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Exam 9: Long-Term Liabilities

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Question 81

True/False

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Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

A) True
B) False

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Question 82

Multiple Choice

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Given the information below,which bond(s) will be issued at a premium? $\begin{array}{|l|c|c|c|c|}\hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \\\hline \text { Stated Rate of Return } & 5 \% & 10 \% & 7 \% & 10 \% \\\hline \text { Market Rate of Return } & 7 \% & 8 \% & 7 \% & 9 \% \\\hline\end{array}$

A) Bond 1
B) Bond 2
C) Bond 3
D) Bonds 2 and 4

E) A) and B)
F) None of the above

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Question 83

Multiple Choice

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Megginson,Inc.issued a five-year corporate bond of $300,000 with a 5% interest rate for $330,000.What effect would the bond issuance have on Megginson,Inc.'s accounting equation?

Leverage enables a company to earn a higher return using debt than without debt.

Pizza Pier issues 7%,10-year bonds with a face amount of $80,000 for $85,951 on January 1,2012.The market interest rate for bonds of similar risk and maturity is 6%.Interest is paid semiannually on June 30 and December 31. 1.Record the bond issue. 2.Record the first interest payment on June 30,2012.

Discount-Mart issues $10 million in bonds on January 1, 2012. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: $\begin{array}{ccccc} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 8,640,967 \\6 / 30 / 12 & \$ 300,000 & \$ 345,639 & \$ 45,639 & 8,686,606 \\12 / 31 / 12 & 300,000 & 347,464 & 47,464 & 8,734,070\\6 / 30 / 13 & 300,000 & 349,363 & 49,363 & 8,783,433 \\12 / 31 / 13 & 300,000 & 351,337 & 51,337 & 8,834,770\end{array}$ -What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster: a.Issue $10 million of 6% bonds at face amount. b.Issue one million shares of common stock for $10 per share. Assuming bonds or shares of stock are issued at the beginning of the year,complete the income statement listed above for each alternative.Which alternative results in the highest earnings per share?

As a company's level of debt increases,bankruptcy risk increases.

On January 1,2012,Ripstick Park issues $800,000 of 8% bonds,due in ten years,with interest payable semiannually on June 30 and December 31 each year.Assuming the market interest rate on the issue date is 8%,the bonds will issue at $800,000.Record the bond issue on January 1,2012,and the first two semiannual interest payments on June 30,2012,and December 31,2012.

X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/12 and retires them.What gain or loss,if any,would X2 record on this date?