11 The journal entry a company records for the issuance of b

11. The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable 12. XYZ Corp. is considering issuing bonds. Please choose the one statement below that is not an advantage of issuing bonds instead of common stock? a. tax savings result b. income to common shareholders may increase c. earnings per share on common stock may be lower d. stockholder control is not affected

Solution

Answer to Question 11.

Option c is Correct.

When the Contract Rate is greater than the Market Rate, the bonds are issued at Premium. The Journal entry to record the issuance of Bonds will be:

Cash                                       XXX
                Premium on Bonds Payable                   XXX
                Bonds Payable XXX

Answer to Question 12.

Option b is Correct.

The issuance of Bonds will incur an liability i n form of interest payment which will decrease income available for distribution to Common Shareholders.

Answer to Question 13.

Option c is Correct.

Par Value of Bonds = $400,000
Semi-annual Interest Payment = $400,000 * 8% * 6/12 = $16,000
No. of semi-annual Interest Payment = 20 years * 2 = 40
Maturity Value of Bonds = $400,000

Therefore, Willam Perry Inc. must pay $400,000 at maturity and 40 semi-annual interest payment of $16,000.

Answer to Question 14.

Option d is Correct.

Issuance Value of Bonds = $200,000 * 98% = $196,000
Discount on Bonds Payable = $200,000 * 2% = $4,000

Discount on Bonds Payable to be amortized semi-annually = $4,000 * 1/20 * 6/12 = $100
Semi-annual Interest Payment = $200,000 * 6% * 6/12 = $6,000

The Journal entry to record the payment of semi-annual interest on Bonds will be:

Interest Expense               6,100
          Unamortized Bonds Discount                   100
          Cash 6,100