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Chapter 14: Q9Q (page 752)

Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?

Short Answer

Expert verified

The costs of issuing bonds should be listed as a deduction in the issuance value and are classified as an expense in the financial statements.

Step by step solution

01

Meaning of Financial Statements

Financial statements are the instruments of judging earning potential and managerial efficiency, which provides a comparison and assist in evaluating the company’s performance. Hence, these provide necessary inputs for predicting and other relevant decision-making purposes.

02

Accounting for bonds issuance costs and their classification in financial statements

The cost borne during the method of debt issuance is termed the unamortized debt issue cost. The costs incurred for issuing bonds should be reported as a decrease in the issuance value and then paid off as an expense over the duration of the bond.

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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.

(Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from Plato Corporation by issuing a \(600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a \)70,000 salvage value.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entry for purchase on December 31, 2017.

(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2018.

(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.

What is done to record properly a transaction involving the issuance of a non-interest -bearing long-term note in exchange for property?

(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.

(Round answers to the nearest cent.)

(a) December 31, 2016. (d) December 31, 2019.

(b) December 31, 2017. (e) December 31, 2020.

(c) December 31, 2018.

What are some forms of off-balance-sheet financing?
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