Exam 14: Financing Liabilities: Bonds and Long-Term Notes Payable

With the straight-line method of bond amortization, interest expense is the same amount every period.

When a company issues a long-term non-interest-bearing note payable in exchange for cash and special rights, the difference between the cash proceeds and the present value of the note is recorded as

When the conversion of bonds payable to common stock is recorded under the market value method and the market value of the common stock exceeds the book value of the bonds at date of conversion, the difference is recorded as a

On April 1, 2013, Bond Corporation issued 8% debentures dated January 1, 2013. The debentures had a face value of $3,000,000 and interest was payable on January 1 and July 1. The debentures were sold at par plus accrued interest. To record this event on April 1, 2013, Everly should debit cash for

Exhibit 14-16 Harry's Inc. issued a four-year, $75,000, non-interest-bearing note to a customer on January 1, 2016. Harry also agrees to sell inventory to the customer at reduced rates over a five-year period. Sales are to be evenly spread over the five-year period. Harry's incremental interest rate is 8%, and the present value of the note is $55,125. -Refer to Exhibit 14-16.What is Harry's sales revenue connected with the note in 2018 ?

GAAP requires the borrowers to record the note payable at its present value and use straight line method to record the interest expense.

Two methods of amortization of a discount or premium are used by businesses. These two methods are the effective interest method and the straight-line method. Required: a. Explain how premiums and discounts are amortized using the straight-line and effective interest methods. a. The straight-line method assumes that interest expense will be constant each period. Premium/discount amortization under this method is accomplished by dividing the premium or discount by the number of interest payment periods. The resulting amount is added to/deducted from interest expense in equal amounts each period. Interest expense is the interest paid plus or minus the discount or b. State which of the two methods is preferred and explain why. c. Explain why many companies are able to use the method that is not considered GAAP.

Which statement is true?

On January 1, 2016, the Porter Corporation issued a five-year, non-interest-bearing, $44,000 note to Longshore Corporation in exchange for used equipment. Neither the fair market value of the equipment nor that of the note is determinable. The incremental borrowing rate of Porter is 12% and the incremental borrowing rate of Longshore is 10%. Present value factors for n = 5 years are Required: a. Prepare the journal entry to record the issuance of the note by Porter on January 1, 2016. b. Prepare the journal entry to record the interest expense on December 31, 2016. c. Prepare the journal entry to record the interest expense on December 31, 2017.

Exhibit 14-8 Piazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2013, on May 1, 2013, for $393,000 plus accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used. -Refer to Exhibit 14-8. Interest expense after the July 1, 2013, interest payment has been posted is

The straight-line method of amortization assumes a constant

A theoretical difference between the effective interest method and the straight-line amortization method is that

The interest rate used by the creditor to discount the future cash flows of an investment in a restructured loan is the

On January 1, 2016, the Keller Co. issued $140,000 of 20-year 8% bonds for $172,000. Interest was payable annually. The effective yield was 6%. The effective interest method was used to amortize the premium. What amount of premium would be amortized for the year ended December 31, 2016?

The nominal rate is greater than the yield rate when bonds are issued at a premium.

Sharon owes Lawrence Co. $15,000 on a note payable, plus $3,000 of unpaid interest. Lawrence agrees to accept equipment in full settlement of the debt. The equipment is recorded on Sharon's books at $12,000, and it is currently worth $14,200. What types and amounts of gains or losses, if any, should be recorded by Sharon on this troubled debt restructuring?

This year, the bondholders of Brick, Inc. exchanged convertible bonds for common stock. Brick's carrying amount of these bonds was less than the market value but greater than the par value of the common stock issued upon conversion. If Brick used the book value method of accounting for the conversion, which of the following occurred as a result of recording this conversion?

Companies can raise additional capital either by issuing bonds or by selling common stock. And investors can buy either bonds or common stock as a way to earn additional revenue. Both alternatives have ramifications for both the issuing company and the investor. Required: Discuss the advantages and disadvantages of bonds versus common stock from both the issuing company's and the investor's perspective.

When a company offers bondholders a sweetener to induce them to convert their bonds to common stock, the cost of this inducement is reflected in the

Siena sold $120,000 of 6% bonds for $127,125. Each $1,000 bond carried ten warrants and each warrant allowed the holder to acquire one share of $5 par common stock for $25 a share. After the issuance of the securities, the bonds were quoted at 108 and the warrants were quoted at $12. Later, one-fourth of the rights were exercised. Required: Journalize the exercise of the warrants.