Financial Accounting

Long-Term Liabilities: Bonds and Notes

Quiz

Q1: On the first day of its fiscal year, Chin Company issues $10,000,000 of five year, 7% bonds to
finance its operations of producing and selling home improvement products. Interest is payable
semiannually. The bonds were issues at a market (effective) interest rate of 8%, resulting in Chin
Company receiving cash of $9,594,415. (10 Marks)
a. Journalize the entries to record the following:
1. Issuance of the bonds.
2. First semiannual interest payment. The bound discount amortization is combined with the
semiannual interest payment. Round your answer to the nearest dollar.
3. Second semiannual interest payment. The bound discount amortization is combines with
the semiannual interest payment. Round you answer to the nearest dollar.
b. Determine the amount of the bond interest expense for the first year.
c. Explain why the company was able to issue the bonds for only $9,594,415 rather than the face
amount of $10,000,000.

Q2: The following financial data (in thousands) were taken from recent financial statements of Staples,
Inc: (10 Marks)

Year 3 Year 2 Year 1

Interest Expense $ 173,751 $ 214,824 $ 237,025
Earnings Before Taxes 1,459,141 1,356,595 1,155,894

a. Determine the times interest earned ratio for Staples in Year 3, Year 2, and Year 1?
b. Evaluate the ratio for Staples.