17) Ordinarily, the proceeds from the sale of a bond issue will be equal to: A)
ID: 2437551 • Letter: 1
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17) Ordinarily, the proceeds from the sale of a bond issue will be equal to: A) The face amount of the bond. B) The total of the face amount plus all interest payments. C3 The present value of the face amount plus the present value of the stream of interest payments. D) The face amount of the bond plus the present value of the stream of interest payments. 18) A $500,000 bond issue sold at 98. Therefore, the bonds: A) Sold at a discount because the stated rate of interest was lower than the effective rate B) Sold for the $500,000 face amount less $10,000 of accrued interest. C) Sold at a premium because the stated rate of interest was higher than the yield rate. D) Sold at a discount because the effective interest rate was lower than the face rate payment date, the interest expense: A) Remains constant. B) Is equal to the change in book value. C) Increases. D) Decreases. 20) On January 1, 2018, Legion Company sold S200,000 of10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should pay cash interest for the six months ended June 30, 2018, in the amount of: A) $8,850. B) $10,000. C) $10,620. D) $12,000. 21) A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 1 1%. These bonds will sell at a price that is: A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided. 22) A bond is issued with a face amount of $500,000 and a stated interest rate of 10% The current market rate of interest is 8%. These bonds will sell at a price that is A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided.Explanation / Answer
Answer to Question 17 is C.
The proceeds from the sale of a bond issue will be equal to the present value of the face amount plus the present value of the stream of interest payments.
Answer to Question 18 is A.
The bonds are sold at a discount because the stated rate of interest was lower than the effective rate.
Answer to Question 19 is D.
When bonds are sold at a premium, then carrying value of the bond decreases after each interest payment.
In effective interest method is interest expense is calculated on previous carrying value.
So, the interest expense decreases at each interest payment date.
Answer to Question 20 is B.
Face Value = $200,000
Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5% * $200,000
Semiannual Coupon = $10,000
So, Legion should pay cash interest of $10,000 for the six months ended June 30, 2018.
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