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Chapter 14: Q17Q (page 753)
Question: What are the considerations in imputing an appropriate interest rate?
Answer
Considerations while imputing an appropriate interest rate:
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(Comprehensive Problem: Issuance, Classification, Reporting) The following are four independent situations.
(a) On March 1, 2018, Wilke Co. issued at 103 plus accrued interest \(4,000,000, 9% bonds. The bonds are dated January 1, 2018, and pay interest semiannually on July 1 and January 1. In addition, Wilke Co. incurred \)27,000 of bond issuance costs. Compute the net amount of cash received by Wilke Co. as a result of the issuance of these bonds.
(b) On January 1, 2017, Langley Co. issued 9% bonds with a face value of \(700,000 for \)656,992 to yield 10%. The bonds are dated January 1, 2017, and pay interest annually. What amount is reported for interest expense in 2017 related to these bonds, assuming that Langley used the effective-interest method for amortizing bond premium and discount?
(c) Tweedie Building Co. has a number of long-term bonds outstanding at December 31, 2017. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.
Sinking Fund | Maturities | |
2018 | \(300,000 | \)100,000 |
2019 | 100,000 | 250,000 |
2020 | 100,000 | 100,000 |
2021 | 200,000 | - |
2022 | 200,000 | 150,000 |
2023 | 200,000 | 100,000 |
Indicate how this information should be reported in the financial statements at December 31, 2017.
(d) In the long-term debt structure of Beckford Inc., the following three bonds were reported: mortgage bonds payable \(10,000,000; collateral trust bonds \)5,000,000; bonds maturing in installments, secured by plant equipment $4,000,000. Determine the total amount, if any, of debenture bonds outstanding
Question: Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.
Distinguish between the following interest rates for bonds payable:
(a)Yield rate
(b) Nominal Rate
(c) Stated rate
(d) Market rate
(e) Effective rate
(Entries and Questions for Bond Transactions) On June 30, 2017, Mischa Auer Company issued \(4,000,000 face value of 13%, 20-year bonds at \)4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semi-annual interest on June 30 and -December 31.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on June 30, 2017.
(2) The payment of interest and the amortization of the premium on December 31, 2017.
(3) The payment of interest and the amortization of the premium on June 30, 2018.
(4) The payment of interest and the amortization of the premium on December 31, 2018.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet.
(c) Provide the answers to the following questions.
(1) What amount of interest expense is reported for 2018?
(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?
McCormick Corporation issued a 4-year, \(40,000, 5% note to Greenbush Company on January 1, 2017, and received a computer that normally sells for \)31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick’s journal entries for (a) the January 1 issuance and (b) the December 31 interest.
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