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

When a company sells its bonds at less than face value, the effective interest rate is

The following events relate to Mathers Corporation's issue of convertible debentures: · On January 1, 2015, the Mathers Corporation issued $500,000 of 12% convertible bonds for $460,000. The bonds are due on January 1, 2025, and interest is paid on July 1 and January 1. Each $1,000 bond is convertible into 30 shares of common stock with a par value of $1 per share. On the date of bond issuance, a share of common stock was selling at $24. · On January 2, 2017, 12% convertible bonds with a face value of $300,000 were converted into common stock. The market value of the common stock on the date of conversion was $40 per share. Mathers uses the straight-line method to amortize premiums and discounts. Required: a. Prepare the journal entry to record the issuance of the convertible bonds. b. Record the conversion on January 2, 2017, using: 1) the book value method 2) the market value method c. Assuming that any gain or loss on conversion is material, how would it be disclosed in the financial statements?

GAAP requires that cash paid for interest on a note payable is always recorded in the operating activities of the cash flow statement.

Exhibit 14-12 On January 1, 2016, Jewels, Inc. sold $200,000 of its 12% five-year bonds to yield 10%. Interest is paid each January 1 and July 1, and effective interest amortization is used. On May 1, 2018, Jewels, retired $100,000 of the bonds at 104. The book value of the bonds on December 31, 2017, was $212,926. -Refer to Exhibit 14-12. Which of the following would be included in the interest accrual entry on May 1, 2018?

When a company issues bonds, the selling price of the bonds is determined by a number of factors. Two factors that affect bond prices are the bond's contract stated) rate and its effective yield effective rate). Required: Explain the effect on a bond's selling price caused by the stated and effective rates.

Hoosier Co. sold $300,000 of 10% bonds for $311,600. Each $1,000 bond carried ten warrants and each warrant allowed the holder to acquire one share of $10 par value common stock for $25 a share. After the issuance of the securities, the bonds were quoted at 103.5 and each warrant was quoted at $9. Required: Prepare the entry to record the sale of the bonds.

A gain is earned when retiring bonds before their maturity date is recognized by

Which of the following characteristics of a bond would an investor look for if they are wanting to become a shareholder at a later date in time?

Exhibit 14-10 Hawk issued $500,000 of its ten-year 5% bonds for $463,197 on October 1, 2016 so as to yield an effective rate of 6%. Interest is paid each October 1 and April 1 -Refer to Exhibit 14-10. Assuming Hawk uses the effective interest method and reversing entries, the entry to record the payment of interest on April 1, 2017, would include rounded to the nearest dollar)

Discount on Bonds Payable is an)

On January 1, 2016, Darth Corp. issued 50,000 of five-year, $1,000 bonds payable at 104. These bonds were each convertible into 100 shares of $10 par common stock. On January 1, 2019, Darth converted all of these bonds when the stock was selling at $11.50 a share. Required: Complete the matrix below to indicate the amounts that would be recorded for the indicated accounts in the journal entry to record the bond conversion. Then record the journal entry for the bond conversion.

______are bonds that give bondholders the option to exchange the bonds for a predetermined number of common equity shares of the issuing company.

Exhibit 14-11 Omega, Inc. issued $100,000 of its 7% five-year bonds on January 1, 2014, at 98. Interest is paid on January 1 and July 1. The bonds are callable at 104 and straight-line amortization is used. The bonds are recalled on April 1, 2016. -Refer to Exhibit 14-11. The journal entry to record the reacquisition of the bonds will include a

When the market rate of interest is greater than the contract rate of interest, the bonds should sell at

Cat's Eye, Inc. owes Brusters, Inc. $45,000 on a note payable, plus $3,250 interest. Bruster's agrees to accept 1,000 shares of Cat's Eye common stock in full settlement of the debt. The stock has a par value of $5 per share and a current market value of $45 a share. Required: Record this debt restructuring on the books of Cat's Eye.

How does GAAP require a note payable to be valued? What three categories do notes fall within?

Discount on Bonds Payable is a contra liability account

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. Harry's total liabilities after recording the note have increased by

There are two ways, conceptually, that can be used to account for convertible debt. However, only one of them is acceptable under GAAP. Required: Identify the two methods that could be used to record convertible debt and indicate which one is acceptable under GAAP.

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. Harry's interest expense for 2018 is