Page 622 - Accounting Principles (A Business Perspective)

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Exercise B On 2009 December 31, East Lansing Office Equipment Company issued USD 1,600,000 face value
of 8 per cent, 10-year bonds for cash of USD 1,400,605, a price to yield 10 per cent. The bonds pay interest
semiannually and mature on 2019 December 31.

a. State which is higher, the market rate of interest or the contract rate.
b. Compute the bond interest expense for the first six months of 2010, using the interest method.
c. Show how the USD 1,400,605 price must have been determined.
Exercise C Compute the annual interest expense on the bonds in the previous exercise, assuming the bond
discount is amortized using the straight-line method.
Exercise D After recording the payment of the interest coupon due on 2010 June 30, the accounts of Myrtle
Beach Sailboat, Inc., showed Bonds Payable of USD 300,000 and Premium on Bonds Payable of USD 10,572.

Interest is payable semiannually on June 30 and December 31. The five-year, 12 per cent bonds have a face value of
USD 300,000 and were originally issued to yield 10 per cent. Prepare the journal entry to record the payment of
interest on 2010 December 31. Use the interest method. (Round all amounts to the nearest dollar.)
Exercise E On 2010 June 30 (a semiannual interest payment date), Holiday Rollerblade Company redeemed
all of its USD 400,000 face value of 10 per cent bonds outstanding by calling them at 106. The bonds were
originally issued on 2006 June 30, at 100. Prepare the journal entry to record the payment of the interest and the
redemption of the bonds on 2010 June 30.
Exercise F On 2009 August 31, as part of the provisions of its bond indenture, Caribbean Cruise Line, Inc.,
acquired USD 480,000 of its outstanding bonds on the open market at 96 plus accrued interest. These bonds were

originally issued at face value and carry a 12 per cent interest rate, payable semiannually. The bonds are dated 2002
November 30, and pay semiannual interest on May 31 and November 30. Prepare the journal entries required to
record the accrual of the interest to the acquisition date on the bonds acquired and the acquisition of the bonds.
Exercise G Cleveland Heating Systems, Inc., is required to make a deposit of USD 18,000 plus semiannual
interest expense of USD 540 on 2009 October 31, to the trustee of its sinking fund so that the trustee can redeem
USD 18,000 of the company's bonds on that date. The bonds were issued at 100. Prepare the journal entries
required on October 31 to record the sinking fund deposit, the bond retirement, payment of interest (due on that

date), and payment of trustee expenses, assuming the latter is USD 100.
Exercise H After interest was paid on 2010 September 30, USD 60,000 face value of Miami Video Rentals,
Inc., outstanding bonds were converted into 8,000 shares of the company's USD 5 par value common stock.
Prepare the journal entry to record the conversion, assuming the bonds were issued at 100.
Exercise I A recent annual report of Wal-Mart Corporation showed the following amounts as of the dates
indicated:
Year Ended January 31
2001 2000 1999
Earnings before interest (and taxes) $11,583 $10,162 $8,008
(millions)
Interest expense (millions) 1,467 1,079 838
Calculate the times interest earned ratio for each year and comment on the results.
Exercise J What is the present value of a lump-sum payment of USD 20,000 due in five years if the market
rate of interest is 10 per cent per year (compounded annually) and the present value of USD 1 due in five periods at
10 per cent is 0.62092?

Accounting Principles: A Business Perspective 623 A Global Text