Complete the activities in the attachments.

Eye Openers

1. Describe the two distinct obligations incurred by a corporation when issuing bonds.

2. Explain the meaning of each of the following terms as they relate to a bond issue: (a) convertible, (b) callable, and (c) debenture.

3. If you asked your broker to purchase for you a 10% bond when the market interest rate for such bonds was 11%, would you expect to pay more or less than the face amount for the bond? Explain.

4. A corporation issues $9,000,000 of 9% bonds to yield interest at the rate of 7%.

(a) Was the amount of cash received from the sale of the bonds greater or less than $9,000,000? (b) Identify the following terms related to the bond issue: (1) face amount, (2) market or effective rate of interest, (3) contract rate of interest, and (4) maturity amount.

5. If bonds issued by a corporation are sold at a premium, is the market rate of interest greater or less than the contract rate?

6. The following data relate to a $100,000,000, 12% bond issue for a selected semiannual interest period:

Bond carrying amount at beginning of period $112,085,373 Interest paid during period 6,000,000 Interest expense allocable to the period 5,623,113 (a) Were the bonds issued at a discount or at a premium? (b) What is the unamortized amount of the discount or premium account at the beginning of the period? (c) What account was debited to amortize the discount or premium?

7. Assume that Smith Co. amortizes premiums and discounts on bonds payable at the end of the year rather than when interest is paid. What accounts would be debited and credited to record (a) the amortization of a discount on bonds payable and (b) the amortization of a premium on bonds payable?

8. When a corporation issues bonds at a discount, is the discount recorded as income when the bonds are issued? Explain.

9. Assume that two 30-year, 10% bond issues are identical, except that one bond issue

is callable at its face amount at the end of five years. Which of the two bond issues do you think will sell for a lower value?

10. Bonds Payable has a balance of $1,000,000, and Discount on Bonds Payable has a balance of $50,000. If the issuing corporation redeems the bonds at 98, is there again or loss on the bond redemption?

11. What is a mortgage note?

12. Fleeson Company needs additional funds to purchase equipment for a new production facility and is considering either issuing bonds payable or borrowing the money from a local bank in the form of an installment note. How does an installment note differ from a bond payable?

13. How would a bond payable be reported on the balance sheet if: (a) it is payable within one year and (b) it is payable beyond one year?

14. Sol Company issued $10,000,000 of bonds payable at a price of 102. How would the premium on the bonds payable be presented on the balance sheet?

15. What is meant by the phrase “time value of money”?

16. What has the higher present value: (a) $20,000 to be received at the end of two years, or (b) $10,000 to be received at the end of each of the next two years?

EX 12-1

Effect of financing on earnings per share

Miller Co., which produces and sells skiing equipment, is financed as follows:

Bonds payable, 10% (issued at face amount) $10,000,000

Preferred $1 stock, $10 par $10,000,000

Common stock, $25 par 10,000,000

Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $3,000,000, (b) $4,000,000, and (c) $5,000,000.