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Valuing Bonds Using Present Value

SE4: Sanchez, Inc., is considering the sale of two bond issues. Choice A is  a $1,200,000 bond issue that pays semiannual interest of $64,000 and is due in 20 years. Choice B is a $1,200,000 bond issue that pays semiannual interest of $60,000 and is due in 15 years. Assume that the market interest rate for each bond is 12 percent. (Hint calculate the present value of each bond issue and sum)

 

Effective Interest Method

SE6: On March 1, 2014, Smart Way Freight Company sold $200,000 of its 9.5 percent, 20 year bonds at 106. The semiannual interest payment dates are March 1 and September 1. The market interest rate is 8.9 percent. The firm’s fiscal year ends August 31. Prepare journal entries to record the sale of the bonds on March 1, the accrual of interest and amortization of premium on August 31, and the first interest payment on September 1. Use the effective interest method to amortize the premium.

 

Year-End Accrual of Bond Interest

SE7: On October 1, 2014, Tender Corporation issued $250,000 of 9 percent bonds at 96. The bonds are dated October 1 and pay interest semiannually. The market rate of interest is 10 percent, and the company’s year-end is December 31. Prepare the journal entries to record the issuance of the bonds, the accrual of the interest on December 31, 2014, and the payment of the first semiannual interest on April 1, 2015. Assume the company uses the effective interest method to amortize the bond discount.

 

Bond Retirement

SE8: Noble Corporation has outstanding $400,000 of 8 percent bonds callable at 104. On December 1, immediately after the payment of the semiannual interest and the amortization of the bond discount were recorded, the unamortized bond discount equaled $10,500. On the date, $240,000 of the bonds were called and retired. Prepare the journal entry to record the retirement of the bonds on December 1.

 

Bond Conversion

SE9: Evergreen Corporation had $2,000,000 of 6 percent bonds outstanding. There is $40,000 of unamortized discount remaining on the bonds after the March 1, 2014 semiannual interest payment. The bonds are convertible at the rate of 20 shares of $10 par value common stock for each $1,000 bond. On March 1, 2014 bondholders presented $1,200,000 of the bonds for conversion. Prepare the journal entry to record the conversion of the bonds.

 
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