Exercise 10-9A Annual versus semiannual interest for bonds issued at face value

Accounting for Long-Term Debt

Exercise 10-9A Annual versus semiannual interest for bonds issued at face value

Milan Company issued bonds with a face value of $200,000 on January 1, Year 1. The bonds had a 7 percent stated rate of interest and a six-year term. The bonds were issued at face value. Interest is payable on an annual basis.

Required

Write a memo explaining whether the total cash outflow for interest would be more, less, or the same if the bonds pay semiannual versus annual interest.

Exercise 10-10A Determining cash receipts from bond issues

Required

Compute the cash proceeds from bond issues under the following terms. For each case, indicate whether the bonds sold at a premium or discount:

a. Pear, Inc. issued $400,000 of 10-year, 8 percent bonds at 103.
b. Apple, Inc. issued $200,000 of five-year, 12 percent bonds at 97½.
c. Cherry Co. issued $100,000 of five-year, 6 percent bonds at 102½.
d. Grape, Inc. issued $120,000 of four-year, 8 percent bonds at 96.

Exercise 10-11A Stated rate of interest versus the market rate of interest

Required

Indicate whether a bond will sell at a premium (P), discount (D), or face value (F) for each of the following conditions:

a. ____ The stated rate of interest is higher than the market rate.
b. ____ The market rate of interest is equal to the stated rate.
c. ____ The market rate of interest is less than the stated rate.
d. ____ The stated rate of interest is less than the market rate.
e. ____ The market rate of interest is higher than the stated rate.