Intermediate 2 Terry Part #1: Chapter 14

Information: On August 1, Terry issued a $210,000, semi-annual, 7 year, 5.5% bond. The market rate for similar bonds on that day was 6.0%. Terry uses the effective interest method to record the amortization or premiums and discounts. Terrys management has decided to report net bonds on the balance sheet, instead of reporting the bond and its premium or discount separately. No entries have yet been made for the bond.

Terrys management would like to know the effect of the sale on the following ratios: Debt to Equity Ratio (Total Liabilities / Total Equity) Current Ratio ROA

Assignment: Calculations 1. Calculate each of the three (3) ratios before you make any adjustments. 2. Make the appropriate journal entries, if any, to account for the new bond and any accrued interest (including any necessary changes to income tax expense). 3. Make any necessary changes to the financial statements. 4. Calculate the three (3) ratios after you make any adjustments.