Exam 14: Financing Liabilities

Barker Industries issued 2,000 $1,000 bonds at 103. Each bond contains 20 detachable stock warrants that allow the bondholder to purchase a share of Barker's common stock for $50. Immediately after the issue, the warrants were selling for $4 each and the bonds without the warrants were selling for $986. How much will be credited to Additional Paid-in Capital-Stock Warrants? (Round intermediate calculations to four decimal places and your final answer to the nearest dollar.) Use the proportional method.

The assessment of business risk includes analyzing a company's risk tolerance and capital structure.

The effective interest rate properly reflects the effective cost of borrowing at the ________.

Convertible bonds are one type of hybrid security.

On January 2, 2018, Rushmore, Inc. issued 8,000 bonds at $1,080 each. Each bond contains 40 stock warrants, each of which gives the owner the right to purchase one share of Rushmore $10 par value common stock at $50. The current selling price of common stock is $40 per share. Rushmore bonds without stock warrants are currently selling for $1,025. Required: 1. Prepare the journal entry to record the sale of the bonds if the warrants are nondetachable. 2. Prepare the journal entry to record the sale of the bonds if the warrants are detachable using the incremental method. 3. Prepare the journal entry to record the exercise of all detachable warrants on October 5, 2020, when the market price of the stock was $60, using the incremental method.

All companies capitalize bond issue costs which are amortized over the life of the bond issue.

When bonds are issued at a discount, interest expense will be less than interest paid.

Before computing the gain or loss on the early extinguishment of bonds payable, the company must amortize any discount or premium up to the retirement date.

A company can reclassify long-term debt as short-term but it cannot reclassify short-term debt as long-term.

Zhang Company, an IFRS company, sold $9,000,000 of 6%, 3-year bonds on January 1, 2016. The bonds pay interest each December 31. It cost the company $30,000 in bond issue costs. The bonds were sold at par. What is the effective interest rate for the bonds?

On January 2, 2018, Weston, Inc. issued 5,000 bonds at $1,060 each. Each bond contains 20 detachable stock warrants, each of which gives the owner the right to purchase one share of Weston $5 par value common stock at $40. The current selling price of common stock is $30 per share. Weston bonds without stock warrants are currently selling for $1,025 and it has additional warrants on the market selling for $20. Required: 1. Prepare the journal entry to record the sale of the bonds using the proportional method. Round percentages to four decimal places. 2. Prepare the journal entry to record the exercise of all warrants on October 8, 2019, when the market price of the stock was $50.

Discuss what causes bonds to sell at par, a premium, or a discount.

When allocating proceeds from the issuance of bonds with stock warrants, U.S. GAAP allocates the proceeds between the debt and equity components using the proportional method when detachable stock warrants have a determinable market value.

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars. The press was installed on January 2, 2018. The press had no known market value. Hornet agreed to pay $300,000 on December 31, 2020 and asked for a 2% interest rate. At the time, Hornet's incremental borrowing rate was 7%. The seller agreed to the terms and requested interest payments on December 31 each year. What is the carrying value of the note at the end of 2018? (Round any intermediary calculations and your final answer to the nearest dollar.)

Barker Industries issued 6,000 $1,000 bonds at 102. Each bond contains 20 detachable stock warrants that allow the bondholder to purchase a share of Barker's common stock for $50. Immediately after the issue, the warrants were selling for $4 each and the bonds without the warrants were selling for $986. What will be the carrying value of Bonds Payable on the issue date? (Round intermediate calculations to four decimal places and your final answer to the nearest dollar.)

When might a debtor in technical default be required to reclassify long-term debt as short-term?

Disclosures for convertible debt include ________.

Premium amortization reduces the carrying value of the bonds.

When using the fair value valuation for liabilities, a company must disclose both the issue price and the fair value of the debt.

Wilson Corp. issued $9,000,000 of 4% bonds on April 1 at par value. The bonds were dated January 1. The company pays interest on June 30 and December 31 each year. How much will the buyer need to pay the company in accrued interest at purchase and how much will the buyer receive in interest on June 30?