Exam 2: Non-Current Financial Liabilities

On June 1,2017,ABC LTD.provides a vendor with an $18,500 non-interest-bearing note due on June 1,2018,in exchange for furniture with a list price of $18,100.At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 12% per annum for loans that mature in one year or less and 15% for loans with longer maturities.

Jamieson Inc.issues US$1,000,000 of two-year bonds on January 1,2017,at par that mature on December 31,2018. The coupon rate on the bonds is 4% payable annually on December 31.Jamieson's year-end is December 31.It does not accrue interest throughout the year.Exchange rates: - January 1,2017,C$1.00 = US$0.99 - December 31,2017,C$1.00 = US$0.97 - December 31,2018,C$1.00 = US$1.01 - Average rate 2018,C$1.00 = US$0.98 - Average rate 2018,C$1.00 = US$0.99 Required: a)Record the journal entry on the date of issuance of the bond b)Record the journal entry to revalue the obligation at the period end,December 31,2017. c)Record the journal entry to record the payment of interest,December 31,2017.

On April 1,2017,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)?

A company is required to disclose information that enables users to evaluate the significance of financial liabilities on its financial position and performance. Required: List 8 essential aspects that disclosure over financial liabilities should cover:

Compare and contrast the two methods for amortizing the discount/premium. Interest expense in the first period is higher under which method for bonds sold at a discount? For bonds sold at a premium? Why does IFRS require public companies to use the effective interest method? Why do the Accounting Standards for Private Enterprises allow companies to use the straight-line method?

A $100,000 5-year 6% bond is issued on January 1,2012.The bond pays interest annually.The market rate is 7%.What is the selling price of the bonds,rounded to nearest dollar?

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

Define the following: a) Financial liabilities b) A mortgage c) A bond indenture d) Secured bonds e) Debentures f) Stripped bonds g) Serial bonds h) Callable bonds i) Convertible bonds j) Inflation-linked or real-return bonds k) Perpetual bonds

What are "zero-coupon bonds"?

On November 1,2017,FastCare sold $5,000,000 of three-year bonds for $4,750,325. From the proceeds,the company paid accounting fees of 50,000.Interest of 5% is payable annually.What is the effective rate of interest (round to 2 decimal places)?

Explain what an "in-substance defeasance" is and whether this arrangement results in the derecognition of a financial liability.

On January 1,2014,Snuggly Bunny Ltd.issued $3,000,000 of 4%,fifteen-year bonds priced to yield 5%.Interest is payable on June 30 and December 31.Snuggly repurchases the outstanding bonds on July 1,2016,at which time the market rate of interest is 3.5%.Prepare the journal entries for these transactions.

A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 6%.What is the selling premium or discount on the bonds,rounded to nearest dollar?

Universal 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?

What are the reasons for issuing bonds rather than using a bank loan?

When will bonds sell at a discount?

What are some considerations in determining a safe level of debt?

On May 5,2017,Bennix sold $1,000,000 of five-year,3% bonds for $900,500. From the proceeds,the company paid fees of 100,000.Interest is payable semi-annually on May 5 and November 5.What is the effective rate of interest (round to 2 decimal places)?

Complete the following chart to illustrate how leverage can increase investors' returns while concurrently exposing them to large losses. Facts: Calabria Corporation is a new company and has only one asset,its cash of $105,000 from the sale of common shares. In scenario 1,Calabria invests the $105,000 in a venture that will pay out either $85,000 or $135,000 at the end of one year,depending on the success of the venture. In scenario 2,Calabria borrows $210,000 at 7% interest and invests $315,000 in the same project outlined in Scenario 1.The payout will be $255,000 ($85,000 × 3)or $405,000 ($135,000 × 3)because it invests three times as much.

Why do lenders avoid lending large amounts of money to one borrower?