Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2017

Question

Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2017. On December 31, 2017 the bonds were trading on the bond exchange at 102.5. Since the issue date, what has happened to the market rate of interest? A. The market rate has increased B. The market rate decreased. C. The market rate has stayed the same. D. The change in the market rate cannoe be determined. 5. On July 1, 2017, immediately after recording interest payments, Salsa, Inc. retired one fifth of its S500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2012. Which of the following statements is correct? A. Stockholders' equity is not affected by the bond retirement. B. A gain of S2,500 will be reported on the income statement. C. A loss of $2,500 will be reported on the income statement. D. A gain of $402,500 will be reported on the income statement. E. A gain of S97,500 will be reported on the income statement. 6. Which of the following definitions describes a term bond, a serial bond, and a secured bond? a. Matures on a single date b. Secured only by the "full faith and credit" of the issuing corporation. c. Matures in installments d. Supported by specific assets pledged as collateral by the issuer. E. b 7. Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000 What would the effect of the 1st cash interest payment have on Megginson, Inc.'s accounting equation? A. Increase Increase Increase No Effect No Effect Increase E. No Effect No Effect 8. When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds? A. Carrying value and interest expense increase. B. Carrying value and interest expense decrease. C. Carrying value decreases and interest expense increases. D. Carrying value increases and interest expense decreases. E. Carrying value decreasea and interest expense stays the same

Explanation / Answer

Solution 4:

Since the bond is trading at premium on December 31, 2017, it means market rate of interest is decreased. Hence option B is correct,

Solution 5:

Par value of bond retired = $500,000 * 1/5 = $100,000

Retirement value of bond = $97,500

Gain on retirement = $100,000 - $97,500 = $2,500

Hence a gain of $2,500 will be reported in income statement.

Hence option B is correct.

Solution 6:

Term bonds mature on a single date. Serial bond matures in installment. Secured bond supported by specific assets pledged as Collateral by the issuer.

Hence option D is correct.

Solution 7:

Assets - Decrease

Liabilities - Increase

Stockholder's Equity - Decrease

Hence option A is correct.

Solution 8:

When bond are issued at premium, then carrying value and interest expense over the life of bond decrease.

Hence option B is correct.

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