Exam 2: Non-Current Financial Liabilities

What are positive and negative covenants? Give an example of a positive and negative covenant.

What are "non-current liabilities"?

What is the coupon rate?

What are "secured bonds"?

Arlington Corp issued $7,000,000, 5% 6-year bonds on January 1, 2019 at par. Interest is due annually on December 31. The market rate of interest has since increased dramatically to 9%. As such, Arlington can repurchase its bonds on the open market for $6,507,449. They decided to take advantage of this situation, and on January 1, 2023 issued a new series of bonds in the amount of $6,507,449 [two-year bonds, 9% interest payable annually]. The bonds were sold at par and the proceeds were used to retire the 5% bonds. Entry for sale of new bonds Arlington has recorded a gain on the retirement which increases its net income for the year. Ignoring transaction costs and taxation effects, is Arlington any better off? Discuss.

Really Amazing Vacations Ltd. issues $1,000,000 of ten-year, 10% bonds dated January 1,2020. Interest is payable on January 1 and July 1 each year. The proceeds realized from the issue were the $1,048,801 sales price less the $80,000 fee charged by Really Amazing's investment bank. Really Amazing's year-end is December 31. Required: Prepare journal entries: a. The issuance of the bonds. b. Payment of interest and related amortization on July 1, 2020. c. Accrual of interest and related amortization on December 31, 2020.

Cynthia Dixie Accounting Inc. takes advantage of a well-known office furnishings store's low-interest-rate financing. Cynthia buys furniture on the first day of its fiscal year, signing a $19,000, five-year note. The note is payable in full at maturity. Interest is payable annually at 2%. The market rate of interest for similar transactions is 5%. Required: Prepare journal entries to record: a. The purchase of the office furniture. b. The payment of interest and related amortization of the discount at the end of year 1.

Missouri Wheels Ltd. (MW)sold $9,000,000 of fourteen-year, 3% bonds at par on January 1, 2020. Interest is payable on June 30 and December 31 each year. The bonds can be called at any time at 103 plus accrued interest. On April 1, 2021, MW bought back $3,500,000 of bonds on the open market for $2,600,000 including accrued interest and retired them. On August 1, 2022, MW called $4,500,000 of bonds and retired them. MW prepares accrual entries only at year-end. Required: Prepare journal entries to record: a. The open market purchase of the bonds on April 1, 2021. b. The calling of the bonds on August 1, 2022. c. Retirement of the remaining bonds on December 31, 2030, assuming that the final interest payment has already been recorded in the company's books.

A $100,000 5-year 6% bond is issued on January 1, 2021. The bond pays interest annually. The market rate is 7%. What is the selling price of the bonds, rounded to nearest dollar?

A $100,000 5-year 6% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 7%. What is the discount or premium of the sale of the bonds, rounded to nearest dollar?

On June 1, 2020, Bean LTD. provides a vendor with a $125,500 non-interest-bearing note due on June 1, 2023, in exchange for equipment with a list price of $118,100. At what amount will the equipment be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 9% for loans with longer maturities.

What are "callable bonds"?

Ginny Inc. sold $800,000 of two-year bonds for $701,500 less commissions of $50,500. Interest is of 5.5% is payable semi-annually. What is the effective rate of interest (round to 2 decimal places)?

When should an entity offset a financial asset and a financial liability?

Based on the characteristics provided below, what kind of bond is being discussed? 1. ________ permit the issuing company to redeem before maturity. 2. ________ are bonds backed by specific collateral such as a mortgage on real estate. 3. ________ are unsecured bonds. 4. ________ are bonds that do not pay interest and are sold at a discount and mature at face value.

On April 1, 2020, a company sold $3,500,000 of ten year, 6% bonds for $2,222,400. From the proceeds, the company paid $200,000 sales commission. Interest is payable semi-annually on April 1 and October 1. What is the effective rate of interest (round to 2 decimal places)?

What is the role of debt rating agencies and what two benefits result from their rating a company?

Define the following: -Convertible bonds

How should non-current financial liabilities be recorded initially?

A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 6%. What is the selling premium or discount on the bonds, rounded to nearest dollar?