Chapter 10: Quick Study

Let’s go through these Quick Studies one by one: QS 10-1: Advantages of Bond Financing For each statement, determine if it is an advantage or a disadvantage of bond financing: a. Bonds do not affect owner control. • Advantage: Bond financing doesn’t dilute ownership. b. A company earns a lower return with borrowed funds than it pays in interest. • Disadvantage: This situation would reduce the company’s return on equity. c. A company earns a higher return with borrowed funds than it pays in interest. • Advantage: This would increase the company’s return on equity. d. Bonds require payment of periodic interest. • Disadvantage: Regular interest payments are an obligation. e. Interest on bonds is tax deductible. • Advantage: It reduces taxable income, providing a tax shield. f. Bonds require payment of par value at maturity. • Disadvantage: The issuer must repay the principal amount at the bond’s maturity. QS 10-2: Issuing Bonds at Par Dunphy Company issued $10,000 of 6%, 10-year bonds at par value on January 1. The interest is paid semiannually. 1. Issuance of the bonds (January 1): o Journal Entry: bash Debit Cash $10,000 Credit Bonds Payable $10,000 2. First interest payment (June 30): o Semiannual interest = $10,000 × 6% × 1/2 = $300 o Journal Entry: bash Debit Interest Expense Credit Cash $300 $300 QS 10-3: Financial Statement Impact of Bond Transactions Analyze the effects on the accounting equation for transactions in QS 10-2: 1. Issuance of bonds: o Assets (Cash) increase by $10,000. o Liabilities (Bonds Payable) increase by $10,000. 2. Interest payment: o Assets (Cash) decrease by $300. o Expenses (Interest Expense) increase by $300, reducing Equity. QS 10-4: Issuing Bonds at Par 1. First interest payment on June 30 for $3,600,000 bonds: o Interest payment = $3,600,000 × 8% × 1/2 = $144,000 o Journal Entry: bash Debit Interest Expense Credit Cash $144,000 $144,000 2. Cash sale of the remaining $400,000 of bonds on July 1: o Journal Entry: bash Debit Cash Credit Bonds Payable $400,000 $400,000 QS 10-5: Recording Bond Issuance and Interest 1. Issuance of bonds at (a) 99 and (b) 103½: a. At 99: o o Cash proceeds = $20,000 × 99% = $19,800 Journal Entry: bash Debit Cash $19,800 Debit Discount on Bonds Payable Credit Bonds Payable $20,000 $200 b. At 103½: o o Cash proceeds = $20,000 × 103.5% = $20,700 Journal Entry: bash Debit Cash $20,700 Credit Premium on Bonds Payable Credit Bonds Payable $20,000 $700 2. Semiannual interest payment at par: o Interest payment = $20,000 × 12% × 1/2 = $1,200 QS 10-6: Determining Bond Discount or Premium 1. Market rate is 5%: Issued at a premium (market rate < contract rate). 2. Market rate is 6%: Issued at par value (market rate = contract rate). 3. Market rate is 7%: Issued at a discount (market rate > contract rate). QS 10-7: Journalizing Discount Bond Issuance Enviro Company issues 8%, 10-year bonds with a par value of $250,000. The selling price is 87½%. 1. Cash proceeds: $250,000 × 87.5% = $218,750 2. Journal Entry: bash Debit Cash $218,750 Debit Discount on Bonds Payable $31,250 Credit Bonds Payable $250,000 QS 10-8: Journalizing Premium Bond Issuance Garcia Company issues 10%, 15-year bonds with a par value of $240,000. The selling price is 117¼%. 1. Cash proceeds: $240,000 × 117.25% = $281,400 2. Journal Entry: bash Debit Cash $281,400 Credit Premium on Bonds Payable $41,400 Credit Bonds Payable $240,000 These entries demonstrate key concepts in accounting for bond financing, including issuing bonds at par, a discount, or a premium, and recognizing interest payments. Let me know if you need explanations for additional questions!