bond

Question 1

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than:

Answer 1

neither the cash paid to the seller nor the face amount of the bond.

If the investor buys a bond at a discount, then the bond will be carried at the discount price initially, which is below the face amount of the bond. However, if the investor buys a bond between interest payment dates, the investor will pay (in part) for the already accrued interest that the investor will soon receive back. Thus, the carrying amount of the bond will actually be less than the total the investor pays to acquire the bond, both its discount price plus the amount paid for the interest receivable.

Question 2

amortization of bond discount should be reported in which section of the statement of cash flows using the indirect method

Answer 2

operating activities.

The amortization of the bond discount is classified as interest expense and has been deducted in arriving at net income. Using the indirect method, this amortization must be added to net income to compute net cash provided by operating activities.

Question 3

Bonds sell at a premium when the stated rate of interest paid by the bonds exceeds the market rate. The opposite is true if bonds sell at a discount.

Answer 3

In the Lee Co. situation, Lee paid a premium price in 20X1 because Enfield, Inc.’s, interest rate was greater than the market rate. By December 31, 20X2, the situation had changed. The market rate was higher than Enfield’s rate.

Since Enfield’s stated bond interest rate did not change during this period, the only explanation for the change in bond price from premium to discount was that market interest rates increased since Lee purchased the bonds.

Question 4

do convertible bonds affect basic earning per share

Answer 4

no,
Convertible bonds do not affect basic earnings per share. They are used in computing diluted earnings per share. When the preferred stock dividend preference is cumulative, the current-year dividend on preferred stock must be deducted each year in computing the numerator for basic earnings per share, regardless of the amount of preferred dividends actually declared and/or paid.

Question 5

annuity due beginning

Answer 5

ordinary annuity ending

Question 6

state rate < market rate discount

Answer 6

stated rate> market rate premium