Exam 14: Financing Liabilities: Bonds and Notes Payable

A company could decide to call its bonds because it will eliminate any restrictions on operations from certain debt covenants.

Cherry Corporation sold $200,000 of 12% bonds at par. Each $1,000 bond carried ten warrants, each of which allows the holder to acquire one share of $10 par common stock for $30 per share. After issuance, the bonds were quoted at 99 ex rights, and the warrants were quoted at $4 each. Cherry Corporation should have assigned to the rights a value of

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

Nassau Co. owes Dominion Ltd. $115,000 on a note payable, plus $7,500 interest. Dominion agrees to accept land in full settlement. The land is recorded on the books of Nassau at $55,600 and is currently worth $85,000. Required: Prepare the journal entries to record the debt settlement on the books of Nassau.

Match each of the following bond classifications (a-h) with the appropriate characteristic (1-8) by entering the appropriate letter in the space provided.

Premium on Bonds Payable is a(n)

If a company sells its bonds at more than face value, the effective interest rate is

When computing the amortization for a discount or premium for a bond issue only the effective amortization method is permissible under IFRS. Under GAAP however, the straight line or the effective interest method can be used with no regard to materiality.

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.

The Windy City Company issued $500,000 of 12% bonds on January 1, 2013. The bonds were sold for $549,493, and they were expected to yield 10% interest compounded semiannually. The interest dates are June 30 and December 31. The maturity date of the bonds is December 31, 2019. Required: a.Prepare the journal entry to record the issuance of the bonds. b.Using the effective interest method, prepare the journal entries to record the first two interest payments.

On January 1, 2014, New Country issued $200,000 of ten-year 8% bonds at 98. These bonds were callable at 102 anytime after three years. Straight-line amortization was used. On January 1, 2018, a new bond issue was sold and the old bonds were called. What was the loss on bond retirement?

Which of the following bonds pay no interest until maturity?

A company may want to increase its equity capital at a later date in time, in order to accomplish this goal the company decides to issue convertible debt.

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.

Exhibit 14-13 On January 1, 2013, Marney Co. issued $80,000 of serial bonds that pay 9% interest annually. Each December 31, $16,000 of the bonds comes due. The bonds were issued for $84,800. -Refer to Exhibit 14-13. If the bonds outstanding method is in use, what would be the total amount of interest expense for 2015?

Bonds with a face value of $100,000 that are issued for $102,400 have a stated interest rate

Exhibit 14-12 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. -Refer to Exhibit 14-12. What total amounts of extraordinary gains should be recorded by Sharon on this troubled debt restructuring?

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On December 31, 2013, Albright Bank restructures an $800,000, 12% note receivable with $192,000 of accrued interest so that the new principal is $750,000, payable in four years at 10%. Present value factors for n = 4 years are: Required: a.Prepare the journal entry to record the loss on restructuring. b.Prepare the journal entry to record the 2013 interest revenue. c.Compute the carrying value of the note on December 31, 2013. d.Compute the carrying value of the note on December 31, 2017 before the payment is received.

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.