Exam 12: Debt Financing

Kenwood Co. neglected to amortize the premium on outstanding ten-year bonds payable. What is the effect of the failure to record premium amortization on interest expense and bond carrying value, respectively?

When bonds are retired prior to maturity with proceeds from a new bond issue, gain or loss from the early extinguishment of debt, if material, should be

The price of a bond issue is determined by the market or effective rate of interest. A bond issue with a 10% stated interest rate will sell for less than face value if the market or effective rate of interest is 12%. The creditworthiness of the issuing entity is one of the factors that influence the market rate for a specific bond issue. Investors rely heavily on bond ratings provided by Standard & Poor's Corporation and by Moody's Investors Service, Inc. Required: Complete the table below by entering the appropriate rating for each level of risk under the S&P and Moody's rating systems.

The effective-interest method of amortizing bond premiums

RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1, 2011, with interest payable on January 1 and July 1 of each year. If the bonds were issued on April 1, 2011, the amount of accrued interest on the date of sale is

On June 1, 2011, Jefferson Controls, Inc. issued $12,000,000 of 10 percent bonds to yield 12 percent. Interest is payable semiannually on May 31 and November 30. The bonds mature in 15 years. Jefferson Controls, Inc. is a calendar-year corporation.

On February 1, 2010, AmeriGas sold $300,000, 12 percent, ten-year bonds at 96 plus accrued interest. Interest is payable semiannually on June 1 and December 1. The bond issue was dated December 1, 2009. On July 31, 2011, $150,000 of the issue was reacquired at 95 plus accrued interest. Make the entries on the issuer's books for the sale of the bonds, the payment of interest, amortization of premium or discount, and accrual of interest, and reacquisition as needed for 2010 and 2011. Straight-line amortization is recorded at the end of the calendar year and accruals are reversed. (Round all calculations.)

For a bond issue that sells for more than its face value, the market rate of interest is

An entity would be considered the primary beneficiary of a variable interest entity (VIE) if the entity

Any gains or losses from the early extinguishment of debt should be

Littleton Corp. had the following long-term debt at December 31: The debenture bonds amounted to

Debt securities frequently are issued with a convertible feature that permits the holder to convert the bond certificates into a determinable number of shares of common stock at any time before the conversion privilege expires. The conversion feature offers many advantages and some disadvantages both to the issuer and the investor, however. Required: Identify the advantages of convertible debt both to the issuer and the investor.

The issuance price of a bond does not depend on the

Scott Inc. neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect of the failure to record discount amortization on interest expense and bond carrying value, respectively?

RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1, 2011, with interest payable on January 1 and July 1 of each year. If the bonds were issued at 97 on April 1, 2011, the amount of the discount amortized on July 1 (using the straight-line method) would be approximately

On June 30, 2011, Country Inc. had outstanding 10 percent, $1,000,000 face amount, 15-year bonds maturing on June 30, 2016. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2011, of bond discount and bond issue costs were $55,000 and $20,000, respectively. Country reacquired all of these bonds at 96 on June 30, 2011, and retired them. Ignoring income taxes, how much gain or loss should Country record on the bond retirement?

Johnson Corporation bought a new machine and agreed to pay for it in equal annual installments of $6,000 at the end of each of the next five years. Assume the prevailing interest rate for this type of transaction is 12%. Assume the present value of an ordinary annuity of $1 at 12% for five periods is 3.60. The future amount of an ordinary annuity of $1 at 12% for five periods is 6.35. The present value of $1 at 12% is 0.567. How much should Johnson record as the note payable on the balance sheet if financial statements were prepared today?

On July 1, 2011, TJR issued 2,000 of its 8 percent, $1,000 bonds for $1,752,000. The bonds were issued to yield 10 percent. The bonds are dated July 1, 2011, and mature on July 1, 2021. Interest is payable semiannually on January 1 and July 1. Using the effective-interest method, how much of the bond discount should be amortized for the six months ended December 31, 2011?

Swanson Inc. purchased $400,000 of Malone Corp. ten-year bonds with a stated interest rate of 8 percent payable quarterly. At the time the bonds were purchased, the market interest rate was 12 percent. Determine the amount of premium or discount on the purchase of the bonds.

In an effort to increase sales, Blue Razor Blade Company inaugurated a sales promotion campaign on June 30, 2011, whereby Blue placed a coupon in each package of razor blades sold, the coupons being redeemable for a premium. Each premium costs Blue $.50, and five coupons must be presented by a customer to receive a premium. Blue estimated that only 60 percent of the coupons issued will be redeemed. For the six months ended December 31, 2011, the following information is available: What is the estimated liability for premium claims outstanding at December 31, 2011?