Quick Study

QS 17-1 Bond interest LO1

A $15,000 bond with a contract interest rate of 6% was issued on March 1, 2011. Calculate the
cash paid on the first interest payment date if interest is paid:
a. annually
b. semi-annually
c. quarterly
d. monthly

Quick Study 17-1 (10 minutes)

a.
b.
c.
d.

$15,000 6% = $900
$900 6/12 = $450
$900 3/12 = $225
$900 1/12 = $75
1

QS 17-2
LO Bond financing
Curtis Ltd. issued $100,000 of 8% bonds at face value on October 1, 2011. Interest is paid each
March 31 and September 30. If Curtis's tax rate is 40%, what is the annual after-tax borrowing
cost (a) in percentage terms and (b) in dollars?

a. 8% (1 40%) = 4.8%
b. 4.8% $100,000 = $4,800
2

QS 17-3
LO Bond terms and identifications
Match the following terms and phrases by entering the letter of the phrase that best describes
each term in the blank next to the term.
______Serial bonds
______Convertible bonds
______Registered bonds
______Bearer bonds
______Secured bond
______Debentures
______Bond indenture
a. Issuer records the bondholders' names and addresses.
b. Unsecured; backed only by the issuer's general credit standing.
c. Varying maturity dates.
d. Identifies the rights and responsibilities of the issuer and bondholders.
e. Can be exchanged for shares of the issuer's common shares.
f. Unregistered; interest is paid to the person who possesses them.
g. Specific assets of the issuer are mortgaged as collateral.

c.
e.
a.
f.

serial bonds
convertible bonds
registered bonds
bearer bonds

g. secured bonds
b. debentures
d. bond indenture

QS 17-4
LO3 Issuance of bond at par, recording interest payment and accrual
On March 1, 2011, JenStar Inc. issued at par an $80,000, 6%, three-year bond. Interest is to be
paid quarterly beginning May 31, 2011. JenStar's year-end is July 31. A partial payment schedule
is shown below:

a. Record the issuance of the bond on March 1, 2011.

b. Record the payment of interest on May 31, 2011.
c. Record the accrual of bond interest on July 31, 2011, JenStar's year-end, and the
subsequent payment of interest on August 31, 2011.

Quick Study 17-4 (15 minutes)

a.
2011
Mar. 1
Cash ...................................................................................
80,000
Bonds Payable ..........................................................
Record issuance of bond.
b.
May 31
Bond Interest Expense ........................................................ 1,200
Cash .........................................................................
Record payment of interest.
c.
July 31
Bond Interest Expense (1,200 2/3) ...................................31 800
Interest Payable ........................................................
Record accrual of interest.
Aug. 31

Interest Payable ..................................................................31 800

Bond Interest Expense (1,200 1/3) ................................... 400
Cash .........................................................................
Record payment of interest.

80,000

1,200

800

1,200

QS 17-5
LO Issue of bonds at par between interest dates
Presley Corp. issued $200,000 of 6% bonds on November 1, 2011, at par value. The bonds were
dated October 1, 2011, and pay interest each April 1 and October 1. Record the issue of the
bonds on November 1, 2011.
Quick Study 17-5 (10 minutes)
2011
Nov. 1

Cash ..................................................................................................

201,000

Accrued Interest Payable .............................................................

1,000

Bonds Payable ............................................................................

200,000

Issued bonds between interest dates and accrued

interest for one month ($200,000 .06 1/12).

Quick Study 17-6 (15 minutes)

Calculations Using PV Tables:

PV of face amount of $520,000

PV of interest annuity of
$26,000 (= $520,000 10%
6/12)
Total issue price
* Using calculator, PV = $520,000
**Using calculator, PV = $429,047
Quick Study 17-7 (15 minutes)
PV of face amount of $750,000
PV of interest annuity of $20,625
(= $750,000 11% 3/12)
Total issue price

a.
n = 14
i = 12% 6/12
.4423 = $229,996
9.2950 = 241,670

b.
c.
n = 14
n = 14
i = 10% 6/12
i = 14% 6/12
.5051* = $262,652 .3878 = $201,656
9.8986 = 257,364 8.7455 = 227,383

$471,666

$520,016*

$429,039**

a.
$465,745
521,134*

b.
$314,806
435,194

c.
$269,513
406,566

$986,879*

$750,000

$676,079

QS 17-10 Issuance of bonds at a premium, payment of interest LO6

Maier Corporation issued $700,000 of 6%, six-year bonds for $735,902 on July 1, 2011,
the day the bonds were dated. The market interest rate was 5%. Interest is paid semiannually beginning December 31, 2011. Maier uses the effective interest method to
amortize bond discounts and premiums. Record the issuance of the bonds and the first
payment of interest.
Quick Study 17-10
2011
July 1

Dec. 31

Cash ....................................................................................
Premium on Bonds Payable........................................
Bonds Payable ...........................................................
Issued bond at a premium.

735,902

Bond Interest Expense .........................................................

Premium on Bonds Payable .................................................
Cash ..........................................................................
Paid interest on bond; 700,000 6% 6/12 = 21,000;
735,902 5% 6/12 = 18,398.

18,398
2,602

35,902
700,000

21,000

QS 17-11 Bond transactionspremium LO6

Dawson Limited issued 12%, 10-year bonds with a par value of $60,000 and semiannual interest payments. On the issue date, the annual market rate of interest for the
bonds was 10%, and they sold for $67,478. The effective interest method is used to
allocate the interest.

a. What is the total amount of bond interest expense that will be recognized over
the life of the bonds?
b. What is the amount of bond interest expense recorded on the first interest
payment date?
Quick Study
17-11 (10 minutes)
a
Twenty payments of $3,600 ................................................
.
Less: Premium ($67,478 $60,000) ..................................
Total interest expense
b.

$67,478 5% = $3,374 interest expense on first payment date

$72,000
(7,478)
$64,522