Exam 12: Debt Financing

At December 31, 2011, Jenkins Sales & Service has a $100,000, 120-day note payable outstanding. The company has followed the policy of replacing the note rather than repaying it over the last three years. The company's treasurer says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the bank to which the note was issued. The proper classification of the note on the December 31, 2011, balance sheet is

When the interest payment dates of a bond are May 1 and November 1, and the bond is issued on June 1, the amount of interest expense at December 31 of the year of issuance would be for

Which of the following is true regarding SIC 12, "Consolidation--Special Purpose Entities", and FIN 46R, "Consolidation of Variable Interest Entities"?

On January 1, 2011, Deily Corporation issued $500,000 of 10 percent, 10-year bonds at 88.5. Interest is payable on December 31. If the market rate of interest was 12 percent at the time the bonds were issued, how much cash was paid for interest in 2011?

Foster Corporation issued a $100,000, 10-year, 10 percent bond on January 1, 2010, for $112,000. Foster uses the straight-line method of amortization. On April 1, 2013, Foster reacquired the bonds for retirement when they were selling at 102 on the open market. How much gain or loss should Foster recognize on the retirement of the bonds?

The net amount of a bond liability that appears on the balance sheet is the

Which of the following is true of a premium on bonds payable?

Madison Corporation had two issues of securities outstanding-- common stock and a 5 percent convertible bond issue in the face amount of $10,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2011, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $500,000. What amount should Madison credit to the account "Paid-In Capital in Excess of Par" as a result of this conversion assuming Madison does not want to recognize any gain (or loss) on the conversion?

On December 31, 2010, International Refining Company purchased machinery having a cash selling price of $85,933.75. The company paid $10,000 down and agreed to finance the remainder by making four equal payments each December 31 at the implicit interest rate of 12%.

If a $6,000, 10 percent, 10-year bond was issued at 104 plus accrued interest two months after the authorization date, how much cash was received by the issuer?

Bonds usually sell at a discount when

Much of the dissatisfaction about Enron's accounting centered around its use of special purpose entities (SPEs, now referred to by the FASB as variable interest entities or VIEs). Enterprises such as Enron have used VIEs to avoid reporting assets and liabilities for which they are responsible, to defer the reporting of losses that have already been incurred, or to report gains that do not exist. In response both to the abuses of VIEs and to the fragmented and incomplete accounting standards regarding VIEs, the FASB has proposed a new accounting interpretation. Current accounting standards require an enterprise to include subsidiaries in which it has a controlling financial interest in its consolidated financial statements. The focus of current standards is on a parent-subsidiary relationship established through voting ownership interests. The relationship between a business enterprise and a VIE is established through other means. The proposed interpretation would explain how to identify a VIE that is not subject to control through voting ownership interests and would require each enterprise involved with such a VIE to determine whether it provides financial support to the VIE through a variable interest. If an enterprise holds a majority of the variable interests of a VIE or a significant variable interest that is greater than any other party's variable interest, then that enterprise would be the primary beneficiary and would be required to include the VIE in its consolidated financial statements. Explain what is meant by the term "variable interests."

In an effort to increase sales, Rofix Company began a sales promotion campaign on June 30, 2011. Part of this promotion included placing a special coupon in each package of candy bars sold. Customers were able to redeem ten coupons for a Frisbee. Each premium costs Rofix $1.50. Rofix estimated that 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?

On January 1, MAX issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8 percent payable annually each January 1. The bonds were priced to yield 10 percent. The total issue price (rounded) of the bonds was

Selected financial data of Alexander Corporation for the year ended December 31, 2011, is presented below: Common stock dividends were $120,000. The times-interest-earned ratio is

Bonds that were authorized on January 1, 2011, and that pay interest on January 1 and July 1 of each year were issued on October 1, 2011. If the issuer's accounting year ends on December 31, how many months would any discount or premium be amortized in 2011?

Monumental Studios, in an effort to promote the release of their new movie "Ninjas from Space," began a national sales promotion campaign. Two coupons from specially marked boxes (one coupon in each box) of "Sugar Charms" cereal are redeemable for one ticket to the show. Tickets cost Monumental $1.50 each. Monumental estimates that 40 percent of the coupons will be redeemed. At the end of 2011, the following information is available: What is the estimated liability for premium claims outstanding at December 31, 2011?

On January 1, 2010, Kate Products issued ten-year convertible bonds of $1,800,000 at 105. Interest is payable semiannually on June 30 and December 31 at a rate of 12 percent. On June 30, 2012, the company retired bonds of $150,000 at 102 plus accrued interest. Straight-line amortization is recorded at the end of the calendar year.

Unamortized debt premium should be reported on the balance sheet of the issuer as a

Assume A Company has one asset, a B Company bond that Company A purchased on the date of issuance by Company B, and one liability, one of its own bonds issued to finance the acquisition of the B Company bond. Both bond have the same terms: $1,000 face value, 20-year life, and a 12% coupon rate, with interest being paid annually. Both bonds were issued at the market rate of interest of 12%. Both A Company and B Company have elected to apply the fair value option for their respective bonds as allowed under the provisions of Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--Including an amendment of FASB Statement No. 115." Required: Assume that the market rate of interest associated with both bonds decreased to 10%. 1. Explain what the financial effects this change in interest rate would have on both companies if both companies applied the FASB's fair value option. Show calculations to support your answer. 2. Assume now that A Company is required to report the bond asset at its fair value of $1,261, but is also required to report the bond liability at its historical issuance amount of $1,000.