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Chapter 14: 14-27Q_b (page 753)
(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?
The concession that the creditor might grant in a troubled-debt situation is to diminish the face amount of the obligation.
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On January 1, 2017, 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 inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.
Instructions
(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.)
(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.
On December 31, 2017, Hyasaki Corporation has the following account balance:
Bonds payable, due January 1, 2026 \(2,000,000
Discount on bonds payable \) 88,000
Interest payable $ 80,000
Show how the above accounts should be presented on the December 31, 2017, balance sheet, including the proper classifications.
Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?
On April 1, 2017, Seminole Company sold 15,000 of its 11%, 15-year, \(1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its \)10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2018.
Instructions
Prepare the journal entries needed on the books of Seminole Company to record the following.
(a) April 1, 2017: issuance of the bonds.
(b) October 1, 2017: payment of semi-annual interest.
(c) December 31, 2017: accrual of interest expense.
(d) March 1, 2018: extinguishment of 6,000 bonds. (No reversing entries made.)
E14-2 (L01) (Classification) The following items are found in the financial statements.
(a) Discount on bonds payable.
(b) Interest expense (credit balance).
(c) Unamortized bond issue costs.
(d) Gain on repurchase of debt.
(e) Mortgage payable (payable in equal amounts over next 3 years).
(f) Debenture bonds payable (maturing in 5 years).
(g) Notes payable (due in 4 years).
(h) Premium on bonds payable.
(i) Bonds payable (due in 3 years).
Instructions
Indicate how each of these items should be classified in the financial statements.
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