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ACC 100 Lecture Notes - Lecture 6: Notional Amount, Cash Flow

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5 Mar 2021

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Ryerson University

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Document Summary

A bond is a security sold by governments and corporations to raise money from investors today, in exchange for a promised future payment. Bond indenture: the terms of a bond. Indicates the amounts and dates of all payments to be made. In other words, it"s a statement of the terms of a bond, that includes the amounts and dates of all payments to be made. Maturity date: the final repayment date of a bond. Basically, payments on the bond are made until a final repayment date. Term of a bond is the time remaining until the repayment date. Face value (also known as par value): the notional amount used to compute the interest payments. In other words, it"s the notional amount of a bond paid to the holder at maturity. Typically the face value is repaid at maturity. In addition to the face value, most bonds promise additional payments called coupons.

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Related Questions

(a) On 1/1/2015, Shocker Company issued $100,000 face valuebonds. The stated rate for these bonds is 10%, and the interest ispaid semi-annually, on June 30 and December 31. The market rate onthe date of issue was 12%. Bonds mature in three years, on December31, 2017. Required In the table provided, write the amount of thepayment, and the date of all payments that must be made by ShockerCompany to bond holders. Date Amount Date Amount

Date	Amount

(b) On 1/1/2015, Sooner Company issued $100,000face value bonds that make semi-annually on June 30 and December31. The coupon rate is 10% and each semi-annual payment is $5,000.The market rate on the date of issue was 8%. Bonds mature in fiveyears, on December 31, 2019.

Required

On the date of issue, calculate the market price of the bond andrecord journal entry for the issuance of the bond. Showcalculations.

(b)answer for Sooner Company here:

Market Price of the bond on 1/1/2015 is:

Journal entry to be recorded on 1/1/2015:

Calculations for Sooner Company:

Number of period = ___ discount rate to be used = ___ %

Market Price of the bonds:

=

=

(c) On 1/1/2015, Gator Companyissued $200,000 face value bonds that mature in five years, onDecember 31, 2019. The bonds have stated rate of 10%, withsemi-annual payments, on June 30 and December 31. The market rateon the date of issue was 9%, and the bonds were sold for$207,913.

Required

In the amortization table provided, complete the entries for thedates indicated. Write journal entries to be recorded on 6/30/2015and 12/31/2015.

Date	Cash Interest Paid	Interest Expense	Increase/decrease in Outstanding Balance	Outstanding Balance
1/1/2015
6/30/2015
12/31/2015

(Comprehensive Bond Problem)

Prepare the journal entries related to the sale of bonds and subsequent payments on those bonds. Also prepare the year-end accrual of interest expense.

1. Sanford Co. sells

bonds on March 1, 2014. The

bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2017.

The bonds yield

Give the entries through December 31, 2015.

A) Prepare the Bond Discount Amortization Table

Schedule of Bond Discount Amortization

Effective Interest Method

10% Bonds Sold to Yield 12%

Interest Expense

B) Prepare journal entry to record issuance of the bond on March 1, 2014

C) Prepare the journal entry to record the first payment of bond interest on September 1.

D) Prepare the journal entry to reord the accrual of interest at December 31. Assume that no prior accruals have been made.

Note: Amortization table is semi-annual, interest rate is stated as annual value.

E) Prepare the journal entry for the March 1, payment of interest. Assume that no additional accruals

have been made since December and no reversing entry was made at December.

F) Prepare the journal entry to record the payment of bond interest on September 1.

G) Prepare the journal entry to record the accrual of interest at December 31.

See also tabs on payroll and goodwill

crimsonpanda883

7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $ 868 b. $9,320 c. $2,000 d. $4,607

8. What is the correct classification of the account: Discounton Notes Payable?

a. a revenue b. a contra liability c. an asset d. an expense

9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.

a. True b. False

10. A convertible bond is one where a. the issuer can convertfrom

a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.

11. Which of the following statements regarding serial bonds istrue?

a.They are likely to be issued by food companies.

b. They have shorter lives than term bonds.

c.They are strongly backed by the issuer's collateral.

d. The bonds do not all mature on the same date.

12. Bonds are a popular source of financing because

a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.

b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment ofinterest to bondholders.

d. the bondholders can always convert their bonds into stock ifthey choose.

13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?

a.The face amount of the bonds

b. The selling price of the bonds

c.The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?

a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.

b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.

c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.

d. The market rate of interest has no bearing on the sellingprice of the bonds.

15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued

a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.

16. Which of the following statements regarding leases isfalse?

a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.

b. Accounting recognizes two types of leases--operating andcapital leases.

c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.

17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement