Exam 14: Financing Liabilities

For U. S. GAAP reporters, when a long-term obligation becomes payable within the next year, it should be reclassified as a current liability if it will be paid with current assets or the creation of another current liability.

When bonds are sold between interest dates, the issuer will pay the bondholder a lower amount of interest than the annual interest payment due on the next interest date.

Callable bonds can be paid off and retired at the option of the issuing company at specified dates.

A bond issuer incurs a technical default when it ________.

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 3% 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. Required: 1. Compute the selling price of the machine. 2. Prepare the three-year amortization table for the note payable. 3. Prepare the journal entries to record the purchase of the machine, the first annual interest payment, and the final payment of interest and principal.

When a company retires bonds before their due date, it is referred to as debt extinguishment.

Jacobsen, Inc. borrowed $700,000 from F&M Bank on June 15 of the current year. The bank required 6% interest. Interest will be paid when the 12-month note becomes due. What amount should be accrued as Interest Payable for the December 31 year-end of the current year? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

Callable obligations are liabilities for which the creditor can require immediate payment when specified conditions exist.

A company records interest expense by debiting the expense account and crediting notes payable.

Harrison Corporation borrowed $30,000 from F&M Bank on June 1 of the current year. The bank required 9% interest. Interest will be paid when the nine-month note becomes due. What is the amount that will be paid upon maturity of the note? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

On January 2, 2017, Zamarano, Inc. issued 5,000 10-year, 6%, $1,000 bonds at par. Interest is paid each December 31. Each bond is convertible into 25 shares of Zamarano $2 Par Value common stock after two years. The market value of the stock on the date of the issue was $45. On January 2, 2021, when the carrying value of the bonds was $4,570,301, all of the bondholders converted the bonds to stock. Zamarano reports under GAAP. Required: 1. Prepare the journal entry to record the issuance of the bonds. 2. Recompute the interest rate of the bond issue. 3. Record the first interest payment. 4. Record the conversion of the bonds.

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

When a company issues bonds, there is typically one debtor and one creditor that transact directly.

Describe the difference between the valuation of convertible bonds at issue using GAAP and IFRS.

The effective interest rate method computes interest expense by multiplying the stated interest rate by the beginning balance of the debt.

Nondetachable stock warrants issued with bonds payable may be sold separately in the capital markets.

On January 2, Zhang Company borrowed $2,000,000 on a 10-year, 7%, term loan from its bank. Required: Compute the annual interest expense and total interest expense for the loan.

Georgia International borrowed $1,000,000 for eight months from its bank during the current year. Interest is payable in full on the due date of the note. Required: Determine the amount of interest expense for the current year based on the following borrowing dates, fiscal year end dates, and interest rates. Borrowing Date Year-End Date Interest Rate Interest Expense June 1 October 31 10\% September 30 December 31 6\% August 1 December 31 8\% May 1 August 31 9\%

The contract between a corporation and its bondholders is a ________.

Proceeds on the issuance and repayment of the principal on short-term notes payable are generally reported as financing activities on the statement of cash flows.