Accounting: What the Numbers Mean 11th Edition by Wayne McManus,Daniel Viele,David Marshall

Exercise 12

Other accrued liabilities-interest (Note: This is an analytical assignment involving the interpretation of financial statement disclosures.) A review of the accounting records at Corless Co. revealed the following information concerning the company's liabilities that were outstanding at December 31, 2017 and 2016, respectively:

Required:
a. Corless Co. has not yet made an adjustment to accrue the interest expense related to its working capital loans for the year ended December 31, 2017. Assume that the amount of interest to be accrued can be accurately estimated using an average-for-the-year interest rate applied to the average liability balance. Use the horizontal model (or write the journal entry) to record the effect of the 2017 interest accrual for working capital loans.
b. Note that the dollar amount and interest rate of the current maturities of long-term debt have not changed from 2016 to 2017. Does this mean that the $160,000 amount owed at the end of 2016 still has not been paid as of December 31, 2017? (Hint: Explain your answer with reference to other information provided in the problem.)c. Assume that the debenture bonds were originally issued at their face amount. However, the market rate of interest for bonds of similar risk has decreased significantly in recent years and is 7% at December 31, 2017. If the debenture bonds were both callable by Corless Co. and convertible by its bondholders, which event is more likely to occur? Explain your answer.
d. Assume the same facts as in part c. Would the market value of Corless Co.'s debenture bonds be more than or less than the $800,000 reported amount? Is this good news or bad news to the management of Corless Co.?
e. When the Serial Bonds account decreased during the year, what other account was affected, and how was it affected? Use the horizontal model (or write the journal entry) to record the effect of this transaction.