Exam 16: Financing Liabilities

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

On January 2,2016,Weston,Inc.issued 5,000 bonds at $1,060 each.Each bond contains 20 detachable stock warrants,each of which gives the owner the right to purchase one share of Weston $5 par value common stock at $40.The current selling price of common stock is $30 per share.Weston bonds without stock warrants are currently selling for $1,025 and it has additional warrants on the market selling for $20. Required: 1.Prepare the journal entry to record the sale of the bonds using the proportional method. 2.Prepare the journal entry to record the exercise of all warrants on October 8,2019,when the market price of the stock was $50.

For U.S.GAAP reporters,a company can reclassify short-term debt as long-term debt if it intends to refinance or replace the debt with long-term or equity securities,and can demonstrate the ability to consummate the refinancing.

Arco,Inc.issued $500,000 of 4%,10-year convertible bonds at 102 on July 1,2016.What is the correct journal entry for the issue?

On January 2,2014,Zamarano,Inc.issued 5,000 10-year,6%,$1,000 bonds for $5,500,000.Interest is paid each December 31.The market rate of interest for non-convertible bonds is 5%.Each bond is convertible into 25 shares of Zamarano $2 Par Value common stock after two years.The market value of the stock on the date of the issue was $45.On January 2,2018,when the carrying value of the bonds was $5,253,785,all of the bondholders converted the bonds to stock.Zamarano reports under IFRS. Required: 1.Compute the present value of the bond issue. 2.Prepare the journal entry to record the issuance of the bonds. 3.Record the conversion of the bonds.

On November 1,Yung Corp.borrowed $50,000 on a six-month note from its bank.Interest at 8% will be paid when the note is due.Record any journal entries necessary to record these transactions.Yung's fiscal year is the calendar year.

The effective interest rate method computes interest expense by multiplying the stated interest rate by the beginning balance of the debt.

On January 2,Zhang Company borrowed $2,000,000 on a 10-year,7%,term loan from its bank. Required: Compute the annual interest expense and total interest expense for the loan.

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.

Under IFRS,bond discounts are recorded in a separate contra-liability account.

Under the fair value option,companies can elect to value most types of financial assets and obligations at fair value even if they are not required to do so.

When convertible bonds are converted to equity,the company records a gain on conversion when the bond carrying value is greater than the par value of the equity.

Proceeds on issuance and repayment of the principal on short-term notes payable are generally reported as financing activities on the statement of cash flows.

When bonds are sold at a discount between interest dates,the buyer ________.

On January 2,2016,Rushmore,Inc.issued 8,000 bonds at $1,080 each.Each bond contains 40 stock warrants,each of which gives the owner the right to purchase one share of Rushmore $10 par value common stock at $50.The current selling price of common stock is $40 per share.Rushmore bonds without stock warrants are currently selling for $1,025. Required: 1.Prepare the journal entry to record the sale of the bonds if the warrants are nondetachable. 2.Prepare the journal entry to record the sale of the bonds if the warrants are detachable using the incremental method. 3.Prepare the journal entry to record the exercise of all warrants on October 5,2020,when the market price of the stock was $60,using the incremental method.

On January 2,Lincoln Motors,Inc.issued 1,000,$1,000 bonds to finance a new showroom.The bonds are 5-year,6% bonds that pay interest on December 31 each year.When issued,investors required 7% interest and the bonds are due December 31,Year 5. Required: 1.Compute the selling price of the bonds. 2.Prepare the entry to record the sale of the bonds. 3.Prepare the amortization table for the bonds. 4.Prepare the journal entries for the first annual interest payment and the final repayment of the bonds.

Morrison Corporation borrowed $45,000 from Commercial Bank on June 1 of the current year.The bank required 9% interest.Interest will be paid every three months until the 9-month note is paid.What is the total Interest Expense and the Interest Payable at December 31 of the current year?

Elmira,Inc.had $20,000,000 of callable bonds outstanding on December 31,2016.The ten-year bonds were issued on January 1,2010 for $21,100,000 and incurred $100,000 in bond issue costs.Acme can call the bonds at 102 anytime after January 1,2016.The company uses straight-line amortization for bond issue costs and bond premium.Acme decides to call the bonds on January 2,2017. Required: 1.Compute the gain or loss on early extinguishment of debt. 2.Prepare the journal entry to record the debt extinguishment.

Secured bonds are also referred to as debenture bonds.