Exam 2: Non-Current Financial Liabilities

Bold Accountants Co.sells $6,000,000 of 10-year,6% bonds priced to yield 5.5%.The bonds are dated and issued on January 1,2017.Interest is payable on January 1 and July 1 each year.Bold's year-end is June 30. Required: Prepare entries for a.The issuance of the bonds. b.Accrual of interest and related amortization on June 30,2017. c.Payment of interest on July 1,2017. d.Payment of interest and related amortization on January 1,2018.

Arlington Corp issued $7,000,000,5% 6-year bonds on January 1,2014 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 1,2018 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.

Why do companies sell notes directly to the investing public?

Which statement is correct about financial leverage?

What is a bond indenture?

On July 1,2014,Club Country Golf Corp.issued $20,000,000 of five-year,12%,semi-annual bonds for $20,075,000.At time of issue,Club Country paid its investment bank a $75,000 sales commission.On July 31,2017,Club Country calls $12,000,000 of the bonds,paying 104 plus accrued interest,and retires them.On March 31,2018,Club Country purchases the remaining bonds on the open market for $8,180,000 including accrued interest and retires them.Club Country's year-end is August 31.The company does not use reversing entries. Required: a.Prepare journal entries to record: i.The issuance of the bonds on July 1,2014. ii.Repurchase of the bonds on July 31,2017. iii.Payment of interest on December 31,2017. iv.Retirement of the remaining bonds on March 31,2018. b.Provide a brief explanation as to the most likely reasons that Club Country was able to repurchase its bonds at a discount.

What is the "best efforts" approach?

Sally has to decide between the following two options: 1)Take out a student loan of $70,000 and study accounting full time for the next three years.The interest on the loan is 4% per year payable annually.The principle to be paid in full after ten years. "2)Study part time and work part time to earn $15,000 per year for the following six years. Once Sally graduates she estimates that she will earn $30,000 for the first three years and $40,000 the next four years. Sally's banker says the market interest for a ten-year horizon is 6%. Required: a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year-end. b.Based on the NPV which of the two options is better for Sally? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"

A $100,000 5-year 6% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 8%.What is the selling price of the bonds,rounded to nearest dollar?

Blue Corp is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Required: a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)). b.Which proposal will generate the higher estimated ROE? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

Toebee Corporation issued bonds with a part value of $500,000 and a five-year life on May 1,2015.The contract rate is 7%.The bonds pay interest on October 31 and April 30.They were issued at a price of $489,734 when the market rate was 7.5%.Toebee Corporation's year end is December 31. Required: 1)Prepare an amortization table using the effective interest method. 2)Prepare an amortization table using the straight-line method "3)Contrast the two methods,commenting on the following: a.Period interest expense b.Total interest expense c.Discount amortized at maturity d.Amortized cost at maturity"

Bank Buy Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Required: a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)). b.Which proposal will generate the higher estimated ROE? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

On June 1,2017,Bean LTD.provides a vendor with a $125,500 non-interest-bearing note due on June 1,2020,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.

On May 1,2017,SBC INC.buys a computer listed for $12,600.The office supply store agrees to accept a $1,600 down payment and a $11,000,three-year note payable at $3,500 per year.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the note be recorded at in the accounting records?

Canadian Sea Rides Ltd.issues $8,000,000 of four-year,4% bonds dated January 1,2017.Interest is payable on January 1 and July 1 each year.The proceeds realized from the issue were the $8,529,082 sales price less the $50,000 fee charged by Sea's lawyers.Sea's year-end is December 31. Required: Prepare entries for a.The issuance of the bonds. b.Payment of interest and related amortization on July 1,2015. c.Accrual of interest and related amortization on December 31,2015.

What are "stripped bonds"?

Which statement is correct about the financial leverage of a company with an equity base of $400,000?

Which statement is correct about financial leverage?

Which statement is not correct about financial leverage for a $300,000 investment versus a $100,000 investment?

A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 8%.What is the selling price of the bonds,rounded to nearest dollar?