Exam 14: Financing Liabilities

Swanson, Inc. issued $600,000 of 5%, 5-year bonds dated January 1, 2018 on July 1, 2018 when the market required 4% interest for bonds of similar risk. The bonds pay interest on December 31 each year. Required: Determine the selling price of the bonds and prepare the journal entries for the issuance of the bonds and the payment of the first interest payment.

Harrison Corporation borrowed $31,000 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 interest expense for the subsequent year in which the note is due and paid? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

Zambrano Corp. decided to go into the market to repurchase bonds before their due date. The following are the balances of the accounts on the date of the retirement: Bonds Payable $5,000,000 Discount on Bonds Payable $76,000 If Zambrano pays $4,900,000 to retire the bond, what is the gain or loss on the early extinguishment of the debt?

What is the main difference in computing the selling price of a zero-coupon bond and the selling price of a traditional bond?

Companies disclose a detailed listing and description of each significant debt issue, including the names of significant creditors.

Jorge Corp. issued $520,000 of 6%, 10-year bonds on January 2, 2018 for $510,000. In addition, the company incurred $50,000 in bond issue costs. Interest is paid annually on December 31. What is the correct amount of bond interest expense to be recorded on December 31, 2018 using GAAP?

A sinking fund is cash or other assets held in a separate bank account used to retire debt at maturity.

Financing liabilities require disclosure for all of the following except ________.

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars. The press had no known market value. Hornet agreed to pay $300,000 at the end of three years and asked for a 3% interest rate. At the time, Hornet's incremental borrowing rate was 7%. How should the seller and buyer record the transaction?

When bonds are sold between interest dates, the buyer must pay the issuer the amount of accrued interest from the prior interest date.

When determining how to compute the present value of a bond, the buyer computes the ________.

IFRS rules for reclassification of short-term debt are similar to U.S. GAAP except the short-term debt refinancing must occur ________.

Nondetachable stock warrants issued with bonds are, in essence, convertible bonds.

The incremental method allocates proceeds from the issuance of bonds with detachable warrants between debt and equity based on the relative fair values of the bonds and warrants.

Muir, Ltd. measures its trading securities at fair value. It has liabilities that it also measures using the fair value option. Muir has bonds outstanding (originally sold for $2,400,000) in the amount of $2,000,000 with a current bond premium of $349,000. The bonds were selling at 101 on the market on December 31. If its Fair Value Adjustment on Bonds Payable account currently contains a debit amount of $430,000, what adjustment is necessary to report the value of the bonds under the fair value option.

When bonds are issued at par, the market rate is equal to the stated rate.

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 6% interest rate. At the time, Hornet's incremental borrowing rate was 10%. 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 the second year? (Round any intermediary calculations and your final answer to the nearest dollar.)

Secured bonds are also referred to as debenture bonds.

The face value of a bond is also referred to as its par value.

The highest Standard and Poor credit rating is a AAA rating.