On January 1, 2014, Nichols Company issued for $1,085,800 its 20-year, 11% bonds that have a maturity value of $1,000,000 and pay interest semiannually on January 1 and July 1. bond issue costs were not material in amount. Below are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date.
aThe present value of $1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period.
bThe present value of $55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.
(a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds.
(b) Explain why investors would pay $1,085,800 for bonds that have a maturity value of only $1,000,000.
(c) Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose:
(1) The coupon or nominal rate.
(2) The effective or yield rate at date of issue.
(d) If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of issue be affected by an increase or a decrease in the market rate of interest?
> Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. Ho
> What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?
> Teton Corporation issued $600,000 of 7% bonds on November 1, 2014, for $644,636. The bonds were dated November 1, 2014, and mature in 10 years, with interest payable each May 1 and November 1.Teton uses the effective-interest method with an effective rat
> Under what conditions a provision should be recorded?
> On January 1, 2014, Ellen Greene Company makes the two following acquisitions. 1. Purchases land having a fair value of $200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $337,012. 2. Purchases equipment by issu
> Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) The January 1 issuance, (b) The July 1 interest payment, and (c) The December 31 adjusting entry.
> Under what conditions should a contingent liability be recorded?
> On January 1, 2014, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company’s journal entries for (
> Devers Corporation issued $400,000 of 6% bonds on May 1, 2014. The bonds were dated January 1, 2014, and mature January 1, 2017, with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers’s journ
> Distinguish between the following values relative to bonds payable: (a) Maturity value. (b) Face value. (c) Market (fair) value. (d) Par value.
> Assume the bonds in BE14-2 were issued at 103%. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.
> Grant Company has had a record-breaking year in terms of growth in sales and profitability. However, market research indicates that it will experience operating losses in two of its major businesses next year. The controller has proposed that the company
> Assume the bonds in BE14-2 were issued at 98%. Prepare the journal entries for (a) January 1, (b) July1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.
> What are some forms of off-balance-sheet financing?
> The Colson Company issued $300,000 of 10% bonds on January 1, 2014. The bonds are due January 1, 2020, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journalentries for (a) The January issuance, (b
> Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semi annually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.
> What is the required method of amortizing discount and premium on bonds payable? Explain the procedures.
> Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.
> Linda Day George Company had bonds outstanding with a maturity value of $300,000. On April 30, 2014, when these bonds had an unamortized discount of $10,000, they were called in at 104. To pay for these bonds, George had issued other bonds a month earl
> Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?
> What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubled debt restructuring involving a modification of terms? In what ways is the accounting for troubled-debt restructurings non-symmetrical?
> What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled debt restructuring involving a modification of terms?
> On February 1, 2015, one of the huge storage tanks of Viking Manufacturing Company exploded. Windows in houses and other buildings within a one-mile radius of the explosion were severely damaged, and a number of people were injured. As of February 15,
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> On June 30, 2006, County Company issued 12% bonds with a par value of $800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2014. Because of lower interest rates and a significant change in the company&rsq
> Sycamore Candy Company offers an MP3 download (seven-single medley) as a premium for every five candy bar wrappers presented by customers together with $2.50. The candy bars are sold by the company to distributors for 30 cents each. The purchase price
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> What is off-balance-sheet financing? Why might a company be interested in using off-balance-sheet financing?
> Pierre Company has a 12% note payable with a carrying value of $20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is $22,600. Prepare the entry to record the fair value optio
> What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
> Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
> (a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture? What does it contain? (c) What is a mortgage?
> What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?
> How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?
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> Kobayashi Corporation reports in the current liability section of its statement of financial position at December 31, 2014 (its year-end), short-term obligations of $15,000,000, which includes the current portion of 12% long-term debt in the amount of
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> Presented below are two different situations related to Mckee Corporation’s debt obligations. Mckee’s next financial reporting date is December 31, 2014. The financial statements are authorized for issuance on March 1, 2015. 1. Mckee has a
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> Below is a payroll sheet for Otis Import Company for the month of September 2014. The company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax rate is 0.8% and the maximum for both is $7,000. Assume a 10% federa
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> Cedarville Company pays its office employee payroll weekly. Below is a partial list of employees and their payroll data for August. Because August is their vacation period, vacation pay is also listed. Assume that the federal income tax withheld i
> Rodriguez Corporation includes the following items in its liabilities at December 31, 2014. 1. Notes payable, $25,000,000, due June 30, 2015. 2. Deposits from customers on equipment ordered by them from Rodriguez, $6,250,000. 3. Salaries and wages p
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand-Spencer-Annual-report-and-financial-statements-201
> Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from
> On January 1, 2014, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2014, and mature January 1, 2019, with interest payable December 31 o
> Assume the same information as in IFRS14-5, except that the bonds were issued at 84.95 to yield 12%. Prepare the journal entries to record (a) The issuance of the bonds, (b) The payment of interest and related amortization on July 1, 2014, and (c) The
> Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2014, at 119.792 to yield 8%. Interest is payable semiannually on July 1 and January 1. Prepare the journal entries to record (a) The issuance of the bonds, (b) The payment of interest
> Assume the bonds in IFRS14-3 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) The January 1 issuance, (b) The July 1 interest payment, and (c) The December 31 adjusting entry.
> Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2014, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2014, Moran State Bank ag
> At December 31, 2014, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2017. The second is a $6,000,000 bond issue which matures September 30, 2018. The third is a $12,500,000 si
> Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value op
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> On January 1, 2014, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s in
> What are the two methods of amortizing discount and premium on bonds payable? Explain each.
> Presented below are three independent situations. (a) CeCe Winans Corporation incurred the following costs in connection with the issuance of bonds: (1) Printing and engraving costs, $12,000; (2) legal fees, $49,000; and (3) commissions paid to underwrit
> Assume the same information as E14-6. In E14-6 Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2014, and mature January 1, 2019. Interest is payable annually on January 1. I
> On January 1, 2014, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. Prepare the company’s journal entries for (a) The January 1 issuance, (b) The July 1 inter
> Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2014, and mature January 1, 2019. Interest is payable annually on January 1. Instructions Set up a schedule of interest expense
> Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. In E14-4 Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2014, at 102. I
> Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2014, at 102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line method of amortization for bond premium or discount. Instructions Prep
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> Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.
> Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. Thenote was issued at an effective rate of 11% and has a carrying value of $16,000. At year-end, Shonen Knife’s borrowing rate has declined; the fair
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> How is the present value of a non-interest-bearing note computed?
> Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of $330,000 plus $33,000 of accrued interest. The note is due today, December 31, 2014. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued in
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> Distinguish between a current liability, such as accounts payable, and a provision.
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> Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-
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> Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
> The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2008, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements a
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> Using the same information as in E14-22, answer the following questions related to American Bank (creditor). In E14-22 On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing
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> Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, debenture bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, converti