Chapter 10 Homework
Questions
1. Bonds have a maturity date and bear interest over the course of the life of the bond. Bonds are issued as a way to raise money for various purposes.
3. C. The market rate does not affect cash payments after the bond has been issued.
6. D. Callable bonds can be retired early by the issuer.
9. A. Interest paid after the dispersal counts as operating expenses.
10. A.
Exercises
2. 1. Cash will go up by $300,327. This will affect the cash flow and income statements. Bonds Payable will go up by $250,000 on the balance sheet. The debt-to-equity ratio will go up as liabilities increased while owner’s equity stayed the same.
2. When interest is paid on, cash will decreased by $27,500. This will result in an interest expense of the same amount, thus increasing expenses and decreasing owner’s equity.
3. Credit to cash for $27,500. Debit to interest expense under owner’s equity.
7. Bond issued: Debit Cash $127,000. Credit Bond Payable$150,000. Debit Bond Discount $23,000.
Interest payment on Feb.1: Credit Cash $3,000. Debit Interest Expense $3,000.
Bonds paying under the current interest rate are cheaper to buy. Someone that does not require the market rate and is willing to accept a smaller interest rate would be interested in them.
9. To me, these two ratios paint a picture of a company (Applied Technologies) that is doing a better job of managing their debt than Innovative Solutions. Applied Technologies lower debt-to-equity ratio implies that they are borrowing less money than others in their industry, instead relying on investing from outside sources. Furthermore, the high times interest earned ratio says that of they money they are borrowing, they are stretching those funds father and doing more with them. This isn’t to say that Innovative Solutions isn’t also doing something right. If they are a young company, then these ratios will be out of proportion initially as they build infrastructure.
17. 1. This will cause an increase on the statement of cash flows under financing activities.
2. The interest expense has been recognized, however it has not been paid yet. No impact on the statement of cash flows.
3. Statement of cash flows will decrease by $50,000 due to interest payments. This will be recorded in the operating expenses area.
4. Cash will decrease by $960,000 as the debt is paid off early. This is a financing activity.