The market rate of interest for a bond issue which sells for more than its face
ID: 2371889 • Letter: T
Question
The market rate of interest for a bond issue which sells for more than its face value is
Less than the interest rate stated on the bond.
Independent of the interest rate stated on the bonds.
Higher than the interest rate stated on the bond.
Equal to the interest rate stated on the bond.
If the company issues a $100,000, 12%, 10-year bond, that pays interest semiannually when market interest rate is 10%, the bond would sell at an amount
greater than face value.
equal to face value.
that can not be determined based on the information given.
less than face value.
If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
$140,000
$2,000,000
$60,000
$200,000
If a corporation issued $5,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
$500,000.
$5,000,000.
$350,000.
$150,000.
On January 1, Hurley Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a
debit to Interest Expense, $120,000.
credit to Discount on Bonds Payable, $4,000.
debit to Interest Expense, $60,000.
credit to Discount on Bonds Payable, $8,000.
On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on July 1 to record payment of bond interest and the amortization of bond discount using the straight-line method will include a:
credit to Discount on Bonds Payable $2,000.
debit to Interest Expense $30,000.
debit to Interest Expense $60,000.
credit to Discount on Bonds Payable $4,000.
On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. What is the carrying value of the bonds at the end of the third interest period?
$472,000.
$486,000.
$464,000.
$488,000.
PLEASE BE SURE OF THE ANSWERS AND PROVIDE SOLUTION FOR EACH SO THAT I CAN UNDERSTAND.
Less than the interest rate stated on the bond.
Explanation / Answer
The market rate of interest for a bond issue which sells for more than its face value is
Ans :Less than the interest rate stated on the bond.
If the company issues a $100,000, 12%, 10-year bond, that pays interest semiannually when market interest rate is 10%, the bond would sell at an amount
Ans :greater than face value.
If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
Annual Int = 10%*2,000,000 = 200,000
Tax shiled = (1-30%)*200,000 = 140,000
Ans :$140,000
If a corporation issued $5,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
Annual Int = 10%*5,000,000 = 500,000
Tax shiled = (1-30%)*500,000 = 350,000
Ans :$350,000.
On January 1, Hurley Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a
Int exp = 12%*1,000,000/2 = 60,000
It is to be paid on 1Jan. So this will be debited on Dec31.
Ans :debit to Interest Expense, $60,000.
On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on July 1 to record payment of bond interest and the amortization of bond discount using the straight-line method will include a:
Ans :credit to Discount on Bonds Payable $2,000.
On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. What is the carrying value of the bonds at the end of the third interest period?
Issue price = 96%*500,000 = 480,000
Total Disc = 500,000-480,000 = 20000
This is amortized over 5Yr ie 10 periods.
So Each period, disc amortized = 20000/10 = 2000
So Disc AMortised in 3 period = 3*2000=6000
So Carrying Bond value = 480000+6000 = 486,000
Ans: $486,000.
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