会计学原理FinancialAccountingbyRobertLibby第⼋版第⼗章答案
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Chapter 10
Reporting and Interpreting Bonds
ANSWERS TO QUESTIONS
1. A bond is a liability that may or may not be secured by a mortgage on specified
assets. Bonds usually are in denominations of $1,000 or $10,000, are transferable by endorsement, and may be bought and sold daily by investors. A bond specifies
a maturity date and rate of interest that will be paid on the principal amount. Bonds
usually are issued to obtain cash for long-term asset acquisitions (operational assets) and expansion of the entity.
2. A bond indenture is an agreement drawn up by a company planning to sell a bond
issue. The indenture specifies the legal provisions of the bond issue such as maturity date, rate of interes
t, date of interest payments, and any conversion privileges. When a bond is sold, an investor receives a bond certificate (i.e., a bond). All of the bond certificates for a single bond issue are identical in most respects. That is, each certificate states the same maturity date, interest rate, interest dates, and other provisions of the bond issue.
3. Secured bonds are supported by a mortgage or pledge of specific assets as a
guarantee of payment. Secured bonds are designated on the basis of the type of asset pledged, such as real estate mortgage bonds and equipment trust bonds.
Unsecured bonds are not supported by a mortgage or pledge of specific assets as
a guarantee of payment at maturity date. Unsecured bonds usually are called
debentures.
4. Callable bonds—bonds that may be called for early retirement at the option of the
issuer.
Convertible bonds—bonds that may be converted to other securities of the issuer (usually common stock) after a specified future date at the option of the bondholder.
5. Several important advantages of bonds compared with capital stock benefit the
issuer. The issuance of bonds establishes a fixed amount of liability and a fixed rate of interest on the bond, and interest payments to the bondholders are deductible on the income tax return of the issuer. This deduction for tax purposes reduces the net cost of borrowing. For example, a corporation with a 40% average tax rate and bonds payable with a 10% interest rate would incur a net interest rate of 10% x 60% = 6%.
6. The higher the tax rate is, the lower the net cost of borrowing money because the
interest paid on borrowed money is deductible on the income tax return of the borrower. The higher the income tax rate the less the net cost of interest for the borrower. For example, a corporation with an average tax rate of 40% and debt with 10% interest per annum incurs a net interest rate of 10% x 60% = 6%. In contrast, the same corporation with a 20% average tax rate incurs a net interest rate of 10% x 80% = 8%.
7. At the date of issuance, bonds are recorded at their current cash equivalent amount;
that is, the amount of cash received for the bonds when issued. The recording is in conformity with the cost principle.
8. When a bond is issued (sold) at its face amount, it is issued at par. In contrast,
when a bond is sold at an amount lower than the par amount, it is issued at a discount, and conversely, when it is sold at a price above par, it is issued at a premium. A bond will sell at a discount when the market, or effective, rate of interest is higher than the stated rate of interest on the bond. In contrast, when the market or effective rate of interest is lower than the stated
rate, the bond will sell at
a premium. Discounts or premiums on bonds payable are adjustments to the
effective interest rate on the bonds. Therefore, the discount or premium is amortized over the life of the bonds as an increase or decrease in the amount of interest expense for each period.
9. The stated rate of interest is the rate specified on a bond, whereas the effective
rate of interest is the market rate at which the bonds are selling currently.
10. When a bond is sold at par, the stated interest rate and the effective or market
interest rate are identical. When a bond is sold at a discount, the stated rate of interest is lower than the effective rate of interest on the bond. In contrast, when a bond is sold at a premium, the stated rate of interest is higher than the effective rate of interest.
11. A bond issued at par will have a book or carrying value, or net liability, equal to the
par or principal of the bond. This amount should be reported as the carrying value on each balance sheet date. When a bond is sold at a premium or discount, the premium or discount must be amortized over the outstanding life of the bond. When there is bond discount or premium, the par amount of the bond less the unamortized discount, or plus the unamortized premium, must be reported on the balance sheet as the net liability as follows:
Bonds payable ...................................... $100,000 $100,000
Less: Unamortized discount .................. 12,000
Plus: Unamortized premium .................. 12,000
Book value (net liability) ........................ $ 88,000 $112,000
12. The basic difference between straight-line amortization and effective-interest
amortization of bond discount and premium is that, under straight-line amortization, an equal amount of premium or discount is amortized to interest expense each period. Straight-line amortization per interest period is computed by dividing the total amount of the premium or discount by the number of periods the bonds will be outstanding. Under effective-interest amortization, the amount of premium or discount amortized is different each period. Effective-interest amortization of bond premium and discount correctly measures the current cash equivalent amount of the bonds and the interest expense reported on the income statement based on the issuance entry. It measures the amount of amortization by relating the market (yield) rate to the net liability at the beginning of each period. For this reason interest expense and the bond carrying value are measured on a present value basis. The straight-line method can be used only when the results are not materially different from the results of the effective-interest method.
ANSWERS TO MULTIPLE CHOICE
1. c)
2. c)
3. b)
4. d)
5. c)
6. b)
7. c)
8. c)
9. a) 10. c)
Authors’ Recommended Solution Time
(Time in minutes)
* Due to the nature of this project, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that so
me become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class time to discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.
MINI-EXERCISES
M10–1. 1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. May be in notes
5. Not at all
6. May be in notes
M10–2.
Principal $600,000 ? 0.4564 = $273,840
Interest $ 24,000 ?13.5903 = 326,167
Issue Price = $600,007* *Issue price should be exactly $600,000. The $7 difference is the result of
rounding the present value factors at four digits.
M10–3.
Principal $900,000 ? 0.4350 = $391,500
Interest $ 27,000?13.2944 = 358,949
Issue Price = $750,449
M10–4.
January 1, 2014:
Cash (+A) .............................................................................. 940,000
Discount on Bonds Payable (+XL, -L) ................................... 60,000
Bonds Payable (+L) .......................................................... 1,000,000 June 30, 2014:
Interest Expense (+E, -SE) ($940,000 ? 11%? 1/2) ............. 51,700
Discount on Bonds Payable (-XL, +L) ............................... 1,700 Cash (-A) ($1,000,000 ? 10%? 1/2) ................................. 50,000 M10–5.
January 1, 2014:
Cash (+A) .............................................................................. 580,000
Discount on Bonds Payable (+XL, -L) ................................... 20,000
Bonds Payable (+L) ........................................................... 600,000 June 30, 2014:
Interest Expense (+E, -SE) ................................................... 31,000
Discount on Bonds Payable (-XL, +L) ............................... 1,000 Cash (-A) ........................................................................... 30,000 M10–6.
Principal $500,000 ? 0.4564 = $228,200
Interest $ 25,000 ?13.5903 = 339,758
Issue Price = $567,958
M10–7.
January 1, 2014:
Cash (+A) .............................................................................. 620,000
Premium on Bonds Payable (+L) ...................................... 20,000 Bonds Payable (+L) ..........................................................
600,000 December 31, 2014:
Interest Expense (+E, -SE) ................................................... 52,000
Premium on Bonds Payable (-L) ........................................... 2,000
Cash (-A) ........................................................................... 54,000 M10–8
January 1, 2014:
Cash (+A) .............................................................................. 910,000
Premium on Bonds Payable (+L) ...................................... 60,000 Bonds Payable (+L) ..........................................................
850,000 December 31, 2014:
Interest Expense (+E, -SE) ($910,000 ? 7%) ........................ 63,700
Premium on Bonds Payable (-L) ........................................... 4,300
Cash (-A) ($850,000 ? 8%) ................................................ 68,000
M10–9.
The debt-to-equity ratio and times interest earned ratio are both measures of the
risk associated with using debt in the capital structure of a company. A company
could have a high debt-to-equity ratio with relatively little risk if it generated a high level of stable earnings. On the other hand,
a company with a lowdebt-to-equity
ratio might be risky if it was unable to earn any profits. For this reason, most
analysts look to the times interest earned ratio as a measure of a company’s
ability to meet its required interest payments.
M10–10.
If the interest rates fall after the issuance of a bond, the bond’s price will increase.
The company will report a loss on the debt retirement. On the balance sheet,
cash and bonds payable will decrease. On the income statement, a loss would
be recorded.
M10–11.
When a company issues a bond at a discount, the interest expense each period
will be more than the cash payment for the interest. When a company issues a
bond at a premium, the interest expense will be less than the cash payment for
the interest. Neither is affected by the method used to amortize the discount or
premium.
M10–12.
Cash paid to retire a bond would be reported in the financing activities section of
the Statement of Cash Flows while cash paid for interest payments would be
reported in the operating activities section.
EXERCISES
E10–1.
1. Bond principal, par value, or face value
2. Par value or face value
3. Face value or par value
4. Stated rate, coupon rate, or contract rate
5. Debenture
6. Callable bonds
7. Convertible bonds
E10–2.
The AT&T bonds have a coupon interest rate of 6.5%. If bonds with a $10,000 face value were purchased, the issue price would be $8,950 and they would provide a cash yield of 7.3%. A decline in value after issuance would have no impact on AT&T’s financial statements.
E10–3.
CASE A:
$100,000 x 0.5835 ........................................................ $ 58,350
$8,000 x 5.2064 ............................................................ 41,651

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