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Chapter 14: Q11Q (page 753)

Question: What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?

Short Answer

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Answer

A call feature is a characteristic in the contract of bond that permits the issuer to repay bonds at a stated price within specified future time interval. The call feature has no effect on the amortization of bond premium or discount.

Step by step solution

01

Meaning of bond issue

Bond issue is a method adopted by the firms for raising money. Herein, the investor agrees to give the corporation a specified amount of money for a particular time period. In return, the investor obtains regular payment of interest.

02

“Call” feature of a bond issue

The call feature of a bond issue permits the issuer the advantage of buying, after a specified date at a aforesaid price, outstanding bonds with the motive of diminishing indebtedness or taking benefit of lesser rates of interest.

03

The way by which the call feature affects the amortization of bond premium or discount

The call feature remains unaffected by the amortization of bond discount or premium as untimely redemption is uncertain, the term of bonds is to be used for the cause of amortization.

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Most popular questions from this chapter

BE14-1 (L01) Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semi-annually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

  1. Prepare the journal entry on Gottlieb’s books for debt restructure.
  2. Prepare the journal entry on Ceballos’s books for debt restructure

What disclosures are required relative to long-term debt and sinking fund requirements?

Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.

(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.

(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.

Assume the bonds in BE14-2 were issued at 103. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semi-annually.
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