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Chapter 12: Q1DC (page 669)

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

Short Answer

Expert verified

The given bonds are issued at a discount and the amount received on the issue is $480,000.

Step by step solution

01

Definition of bonds

The bond is a long-term debt that is issued by the company to fulfill a large number of cash needs.

02

Cash received on the issue of bonds

颁补蝉丑鈥夆赌塕别肠别颈惫别诲鈥�=鈥夆赌塅补肠别鈥夆赌塚补濒耻别鈥夆赌塷蹿鈥塼丑别鈥夆赌塀辞苍诲蝉脳鈥塈蝉蝉耻别鈥夆赌塸谤颈肠别=鈥�$500,000脳鈥�96=鈥�$480,000

At the maturity of the bonds, Brooks needs to pay $500,000.

The difference between the cash received on the issue and the amount paid back is known as the discount this amount is amortized with payment of the interest.

03

Business strategy 

This is a good business strategy because the long-term bonds have a low-interest expense on the other hand if he borrows for short periods then the interest expense is more. Hence, borrowing for long periods is a good business strategy.

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Most popular questions from this chapter

What is the journal entry to retire bonds at maturity?

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell Company has extra cash and wishes to retire the bonds payable

on

January 1, 2019, immediately after making the second semiannual interest

payment. To

retire the bonds, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company鈥檚 carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company鈥檚 gain or loss on the retirement of the bonds

payable.

Reporting current and long-term liabilities

Pediatric Dispensary borrowed \(390,000 on January 2, 2018, by issuing a 15% serial

bond payable that must be paid in three equal annual installments plus interest for the

year. The first payment of principal and interest comes due January 2, 2019. Complete

the missing information. Assume the bonds are issued at face value.

December 31

2018 2019 2020

Current Liabilities:

Bonds Payable \) \( \)

Interest Payable

Long-term Liabilities:

Bonds Payable

Accounting for long-term notes payable transactions

Consider the following note payable transactions of Caleb Video Productions.

2018

Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% note

payable. The note requires annual principal payments of \)16,000 plus

interest each October 1.

Dec. 31 Accrued interest on the note payable.

2019

Oct. 1 Paid the first installment on the note.

Dec. 31 Accrued interest on the note payable.

Requirements

1. Journalize the transactions for the company.

2. Considering the given transactions only, what are Caleb Video Productions鈥� total

liabilities on December 31, 2019?

Bond prices depend on the market rate of interest, stated rate of interest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?

Explain your answer.
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