Accounting Study Set 8

Business

Quiz 14 :

Long-Term Liabiities:bonds Andnotes

Quiz 14 :

Long-Term Liabiities:bonds Andnotes

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Discount amortization Using the bond from Practice Exercise 14-2A, journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar. Using the bond from Practice Exercise 14-2B, journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar.
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3A: Discount amortization:
Journal entries:
(Amount in $)
img 3B: Discount amortization:
Journal entries:
(Amount in $)
img

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Effect of financing on earnings per share Rhett Co., which produces and sells biking equipment, is financed as follows: img Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $15,000,000, (b) $17,500,000, and (c) $20,000,000.
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Effect of financing on EPS:
Earnings per share (EPS): Earnings per share measures the income earned by each share of common stock.
EPS can be calculated by using the formula below:
img img

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If you asked your broker to purchase for you a 12% bond when the market interest rate for such bonds was 11%, would you expect to pay more or less than the face amount for the bond Explain.
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Since the market interest rate is less than the contract rate of interest, the bonds can be purchased at more than its face value. This is because; every investor is ready to purchase the bonds that paying a higher contract rate of interest than the rate they would earn in the market.

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A corporation issues $26,000,000 of 9% bonds to yield interest at the rate of 7%. (a) Was the amount of cash received from the sale of the bonds greater or less than $26,000,000 (b) Identify the following amounts as they relate to the bond issue: (1) face amount, (2) market or effective rate of interest, (3) contract rate of interest, and (4) maturity amount.
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Bond discount, entries for bonds payable transactions On July 1, 2014, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2015, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2014. 4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest 5. (Appendix 1) Compute the price of $42,309,236 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
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Evaluate alternative financing plans Based on the data in Exercise 14-1, what factors other than earnings per share should be considered in evaluating these alternative financing plans
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Bond premium, entries for bonds payable transactions obj. 2 , 3 Rodgers Corporation produces and sells football equipment. On July 1, 2014, Rodgers Corporation issued $65,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2014. 4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest 5. (Appendix 1) Compute the price of $73,100,469 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
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Present values Alex Kelton recently won the jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options: a. Receive $100,000,000 in cash today. b. Receive $25,000,000 today and $9,000,000 per year for 8 years, with the first payment being received one year from today. c. Receive $15,000,000 per year for 10 years, with the first payment being received one year from today. Assuming that the effective rate of interest is 7%, which payout option should Alex select Use the present value tables in Appendix A. Explain your answer and provide any necessary supporting calculations.
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Explain the meaning of each of the following terms as they relate to a bond issue: (a) convertible, (b) callable, and (c) debenture.
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Effect of financing on earnings per share Three different plans for financing an $18,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income. img Instructions 1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $2,100,000. 2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $1,050,000. 3. Discuss the advantages and disadvantages of each plan.
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Describe the two distinct obligations incurred by a corporation when issuing bonds.
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General Electric bond issuance General Electric Capital , a division of General Electric , uses long-term debt extensively. In a recent year, GE Capital issued $11 billion in long-term debt to investors, then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt). Bill Gross, a manager of a bond investment fund, "denounced a 'lack in candor' related to GEs recent debt deal. 'It was the most recent and most egregious example of how bondholders are mistreated'. Gross argued that GE was not forthright when GE Capital recently issued $11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as $50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date." In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering Source: Jennifer Ablan, "Gross Shakes the Bond Market; GE Calms It, a Bit," Barron's , March 25, 2002.
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Preferred stock vs. bonds Xentec Inc. has decided to expand its operations to owning and operating golf courses. The following is an excerpt from a conversation between the chief executive officer, Peter Kilgallon, and the vice president of finance, Dan Baron. Peter: Dan, have you given any thought to how we're going to the acquisition of Sweeping Bluff Golf Course Dan: Well, the two basic options, as I see it, are to issue either preferred stock or bonds. The equity market is a little depressed right now. The rumor is that the Federal Reserve Bank's going to increase the interest rates either this month or next. Peter: Yes, I've heard the rumor. The problem is that we can't wait around to see what's going to happen. We'll have to move on this next week if we want any chance to complete the acquisition of Sweeping Bluff Golf Course. Dan: Well, the bond market is strong right now. Maybe we should issue debt this time around. Peter: That's what I would have guessed as well. Sweeping Bluff Golf Course's financial statements look pretty good, except for the volatility of its income and cash flows. But that's characteristic of the industry. Discuss the advantages and disadvantages of issuing preferred stock versus bonds.
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Corporate financing The financial statements for Nike, Inc. , are presented in Appendix C at the end of the text. What is the major source of financing for Nike
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Issuing bonds at a discount On the first day of the fiscal year, a company issues a $2,000,000, 8%, five-year bond that pays semiannual interest of $80,000 ($2,000,000 × 8% × 1/2), receiving cash of $1,920,873. Journalize the bond issuance. On the first day of the fiscal year, a company issues a $3,000,000, 11%, five-year bond that pays semiannual interest of $165,000 ($3,000,000 × 11% × 1/2), receiving cash of $2,889,599. Journalize the bond issuance.
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Bond premium, entries for bonds payable transactions Wishaw, Inc. produces and sells outdoor equipment. On July 1, 2014, Wishaw, Inc. issued $150,000,000 of 20-year, 12% bonds at a market (effective) interest rate of 9%, receiving cash of $191,403,720. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2014. 4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest 5. (Appendix 1) Compute the price of 191,403,720 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
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Alternative financing plans Texcar Co. is considering the following alternative financing plans: img Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming income before bond intere and income tax is $1,200,000. Brower Co. is considering the following alternative financing plans: img Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $2,000,000.
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Bond discount, entries for bonds payable transactions On July 1, 2014, Bryant Industries Inc. issued $100,000,000 of 20-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $91,420,905. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2015, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2014. 4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest 5. (Appendix 1) Compute the price of $91,420,905 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
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Effect of financing on earnings per share Three different plans for financing an $80,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income. img Instructions 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $10,000,000. 2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $6,000,000. 3. Discuss the advantages and disadvantages of each plan.
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Ethics and professional conduct in business Solar Industries develops and produces high-efficiency solar panels. The company has an outstanding $10,000,000, 30-year, 10% bond issue dated July 1, 2009. The bond issue is due June 30, 2038. Some bond indentures require the corporation issuing the bonds to transfer cash to a special cash fund, called a sinking fund, over the life of the bond. Such funds help assure investors that there will be adequate cash to pay the bonds at their maturity date. The bond indenture requires a bond sinking fund, which has a balance of $1,200,000 as of July 1, 2014. The company is currently experiencing a shortage of funds due to a recent acquisition. Bob Lachgar, the company's treasurer, is considering using the funds from the bond sinking fund to cover payroll and other bills that are coming due at the end of the month. Bob's brother-in-law, a trustee of Solar's sinking fund, has indicated willingness to allow Bob to use the funds from the sinking fund to temporarily meet the company's cash needs. Discuss whether Bob's proposal is appropriate.
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