Exam 14: Bonds and Long-Term Notes

On June 30, 2018, Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30, 2019. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2018, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2018, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par:

Zero-coupon bonds:

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

Mann Co. is preparing an Excel spreadsheet for its 5-year, 6%, $400,000 installment notes. The notes were issued on January 1 for $421,236. Installment payments are payable each December 31. A portion of the spreadsheet appears as follows: What formula should Mann use in cell E8 to calculate the book value of the notes after the second interest payment?

In its 2018 annual report to shareholders, Health Foods, Inc., disclosed the following information about some of its indebtedness: In addition, the company disclosed the following: We have outstanding zero coupon convertible subordinated debentures which had a book amount of approximately $158.8 million and $151.4 million at September 26, 2018, and September 28, 2017, respectively. The debentures have an effective yield to maturity of 5 percent and a principal amount at maturity on March 2, 2032, of approximately $308.8 million. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per $1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be redeemed at the option of the holder on March 2, 2022, or March 2, 2027, at the issue price plus accrued original discount totaling approximately $188 million and $241 million, respectively. The fair value of convertible subordinated debentures is estimated using quoted market prices. Book amounts and estimated fair values of our financial instruments other than those for which book amounts approximate fair values as noted above are as follows (in thousands) -Required: Why did the book amount of the debentures increase during fiscal year 2018?

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2018. LPC's accountant has projected the following amortization schedule from issuance until maturity: - LPC issued the bonds:

Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

AMC issues a note with no stated interest rate in exchange for a machine. In accounting for the transaction:

At January 1, 2018, ICN, Inc., was indebted to First Bank under a $480,000, 10% unsecured note. The note was signed January 1, 2014, and was due December 31, 2019. Annual interest was last paid on December 31, 2016. ICN was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First Bank agreed to reduce last year's interest and the remaining two years' interest payments to $23,110 each and delay all payments until December 31, 2019, the maturity date. Required: Prepare the journal entries by ICN, Inc., necessitated by the restructuring of the debt at (A) January 1, 2018, (B) December 31, 2018, and (C) December 31, 2019.

The specific provisions of a bond issue are described in a document called a bond indenture.

On January 1, 2018, for $18 million, Monument Company purchased 10% bonds, dated January 1, 2018, with a face amount of $20 million. For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Required: 1. Prepare the journal entry to record interest on June 30, 2018, using the straight-line method. 2. Prepare the journal entry to record interest on December 31, 2018, using the straight-line method.

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2018. LPC's accountant has projected the following amortization schedule from issuance until maturity: -What is the annual effective interest rate on the bonds?

Listed below are several terms and phrases associated with long-term debt. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. -Convertible bonds

On January 1, 2018, Virginia Beach Industries issued $400,000 of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Beach's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at a price to yield a market (effective) rate of 10%. Beach prepares its financial statements using IFRS. Required: 1. Prepare the journal entry for the issuance of the bonds by Beach. Show calculations. 2. Prepare the journal entry to record interest on June 30, 2018. (the first interest payment) assuming Beach records interest at the effective rate. Show calculations. 3. Prepare the journal entry to record interest on December 31, 2018. (the second interest payment). Show calculations. 4. If Beach follows U. S. GAAP, how would the bonds be recorded differently? Show the journal entry.

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Debt issue costs

Bonds were issued at a discount. In the bond amortization schedule:

Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What would be the total interest expense recognized for the bond issue over its full term?

A disclosure note in the annual financial statements of Macy's Inc. included the following: "Future maturities of long-term debt, other than capitalized leases and premium on acquired debt, are shown below:" For how many years subsequent to the current year must Macy's report these amounts? Name at least two other items that must be disclosed for a company's long-term debt.

Listed below are several terms and phrases associated with long-term debt. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. -Present value of interest plus present value of principal

Ohlson Co. is preparing an Excel spreadsheet for its 20-year, 4.5%, $500,000 bonds payable. The bonds were issued on January 1 to yield 5% annually. Interest is paid semi-annually. A portion of the spreadsheet appears as follows: What formula should Ohlson use in cell C8 to calculate interest expense for the first interest payment?