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Chapter 14: Q20E (page 758)

(Long-Term Debt Disclosure) At December 31, 2017, Redmond Company has outstanding three long-term debt issues. The first is a \(2,000,000 note payable which matures June 30, 2020. The second is a \)6,000,000 bond issue that matures September 30, 2021. The third is a \(12,500,000 sinking fund debenture with annual sinking fund payments of \)2,500,000 in each of the years 2019 through 2023.

Instructions

Prepare the required note disclosure for the long-term debt at December 31, 2017.

Short Answer

Expert verified

On 31 December 2017, notes disclosure for the long-term debt will be as follows:

Requirements for maturities and sinking funds:

Year

Amount $

2018

$0

2019

$2,500,000

2020

$4,500,000 ($2,000,000+$2,500,000)

2021

$8,500,000 ($6,000,000+$2,500,000)

2022

$2,500,000

Step by step solution

01

Definition of Notes to Financial Statement

The information presented at the bottom of the financial statement that provides additional information regarding the assumptions made by the accountant is known as notes to the financial statement.

02

Notes disclosure for long-term debt

(a) $2,500,000 is added to each year’s disclosure because it is an annual payment for sinking funds.

(b) $2,000,000 is added in 2020 because the note payable will mature on 30 June 2020.

(c) $6,000,000 is added in 2021 because the bond payable will mature on 30 September 2021.

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Most popular questions from this chapter

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.

Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor).

Instructions

  1. Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on American’s books.
  2. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  3. Prepare the interest receipt entry for American Bank on December 31, 2018, 2019, and 2020.
  4. What entry should American Bank make on January 1, 2021?

How should discounts on bonds payable be reported on the financial statements? Premium on bonds payable?

Karen Austin Inc. has issued three types of debt on January 1, 2017, the start of the company’s fiscal year.

  1. \(10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
  2. \)25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
  3. $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.
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