Exam 12: Debt Financing

Which of the following is true of accrued interest on bonds that are sold between interest dates?

On January 2,2009,Portier Enterprises issued $2,400,000 of 8 percent,15-year semiannual coupon bonds to yield 7.5 percent.Each bond is convertible into 40 shares of $15 par common stock,which was trading at $20 per share on the date of the bond issue.The bonds were issued at 106.Without the conversion feature,the bonds would have been issued for 104.5. On January 3,2014,all of the bonds were converted into common stock.The market price of the stock was $28 per share on the date of conversion.The issue premium is amortized using the straight-line method. (1)Provide the journal entry to record issuance of the bonds. (2)Provide the journal entry to record the conversion of the bonds assuming Portier considers the conversion (a)not to be a significant culminating transaction. (b)to be a significant culminating transaction. (3)Explain the theoretical justification for either the book value or market value method of recording conversion.

Debentures are

In an effort to increase sales,Moore Company began a sales promotion campaign on June 30,2014.Part of this promotion included placing a special coupon in each package of candy bars sold.Customers were able to redeem ten coupons for a baseball.Each premium costs Moore $1.50.Moore estimated that 70 percent of the coupons issued will be redeemed.For the six months ended December 31,2014,the following information is available: What is the estimated liability for premium claims outstanding at December 31,2014?

When bonds are redeemed by the issuer prior to their maturity date,any gain or loss on the redemption,if material,is

The globalization of business has caused many changes in how enterprises are managed.One such change is illustrated by U.S.enterprises obtaining loans denominated in foreign currencies. Identify reasons why such borrowings may occur.

Listed below are the current liability section and the note 5 for short-term obligations of the balance sheet of Gaunt Corporation: 5.Short-Term Obligations Gaunt's short-term obligations consist of notes payable and commercial paper.Notes payable as December 31,2014,totaled $36 million at an average annual interest rate of 5.7 percent,compared with $7 million at an average annual interest rate of 5.7 percent at year-end 2013.Commercial paper borrowings at December 31,2014,were $699 million at an average annual interest rate of 5.7 percent,compared with $217 million at an average annual interest rate of 5.9 percent as of December 31,2013. Bank lines of credit available to support existing commercial paper borrowings of the corporation amounted to $490 million at both December 31,2014,and 2013.All of these were supported by commitment fees. The corporation also maintains compensating balances with a number of banks for various purposes.Such arrangements do not legally restrict withdrawal or usage of available cash funds.In the aggregate,they are not material in relation to total liquid assets. Required: 1.What amount of Gaunt's long-term debt reflected in its current liabilities did Gaunt pay off in 2014? 2.Explain the origin of the $289 figure. 3.During 2014,did Gaunt reduce its average yearly interest requirements on its short-term obligations described in note 5? Do you observe any interesting issues you might want to learn more about? If so,what are they? 4.Do the lines of credit that Gaunt holds at the end of 2014 appear as liabilities on its balance sheet? Explain.

On June 30,2014,Island Inc.had outstanding 10 percent,$1,000,000 face amount,15-year bonds maturing on June 30,2019.Interest is paid on June 30 and December 31,and bond discount and bond issue costs are amortized on these dates.The unamortized balances on June 30,2014,of bond discount and bond issue costs were $55,000 and $20,000,respectively.Island reacquired all of these bonds at 96 on June 30,2014,and retired them.Ignoring income taxes,how much gain or loss should Island record on the bond retirement?

On May 1,2013,H.Campbell acquired $300,000 of Cobbler Enterprises 12 percent bonds due in five years with interest payable semiannually on May 1 and November.The bonds were purchased at $323,165--a price to return 10 percent on the investment.On November 1,2013,and May 1,2014,Campbell collected the interest on the bonds.On August 1,2014,Campbell sold the bonds at 107 plus accrued interest. Rounding figures to the nearest dollar,provide the entries required to record the: (1)Interest collections in 2013 and 2014,assuming that the entries for the premium amortization are made at the time interest is collected.(Use the effective-interest method.)(2)Sale of bonds.

Conrad,Inc.has $2,000,000 of notes payable due June 15,2015.At the financial statement date of December 31,2014,Conrad signed an agreement to borrow up to $2,000,000 to refinance the notes payable on a long-term basis.The financing agreement called for borrowings not to exceed 80 percent of the value of the collateral Conrad was providing.At the date of issue of the December 31,2014,financial statements,the value of the collateral was $2,400,000 and was not expected to fall below this amount during 2015.In its December 31,2014,balance sheet,Conrad should classify notes payable as

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective)rate of interest

If a $1,000,9 percent,10-year bond was issued at 96 plus accrued interest one month after the authorization date,how much cash was received by the issuer?

Romer Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1, 2014, with interest payable on January 1 and July 1 of -If the bonds were issued at 97 on April 1,2014,plus accrued interest,the amount of cash received by Romer Corporation would be

Thunder Corporation is authorized to issue $500,000 of 6 percent,10-year bonds dated July 1,2014,with interest payments on December 31 and June 30.When the bonds are issued on November 1,2014,Thunder Corporation receives cash of $515,000,including accrued interest.The journal entry to record the issuance of the bonds would include

On January 1,2014,Roger Inc.issued its 10 percent bonds in the face amount of $1,500,000.They mature on January 1,2024.The bonds were issued for $1,329,000 to yield 12 percent,resulting in bond discount of $171,000.Roger uses the effective-interest method of amortizing bond discount.Interest is payable July 1 and January 1.For the six months ended June 30,2014,Roger should report bond interest expense of

Ominous Studios,in an effort to promote the release of their new movie "Dragons from Space," began a national sales promotion campaign.Two coupons from specially marked boxes (one coupon in each box)of "Sweet Pops" cereal are redeemable for one ticket to the show.Tickets cost Ominous $1.50 each.Ominous estimates that 40 percent of the coupons will be redeemed.At the end of 2014,the following information is available: What is the estimated liability for premium claims outstanding at December 31,2014?

Brawn Co.has a $20,000,two-year note payable to Gassaway City Bank that matures June 30,2014.Brawn's management intends to refinance the note for an additional three years and is negotiating a financing agreement with Gassaway City.In order to exclude this note from current liabilities on its December 31,2013,balance sheet,Brawn Co.must

Outstanding bonds payable are converted into common stock.Under either the book value or market value method,the same amount would be debited to

On July 1,2014,Martinez Manufacturing Co.issued a five-year note payable with a face amount of $250,000 and an interest rate of 10 percent.The terms of the note require Martinez to make five annual payments of $50,000 plus accrued interest,with the first payment due June 30,2015.With respect to the note,the current liabilities section of Martinez' December 31,2014,balance sheet should include

Bridge Corporation had two issues of securities outstanding-- common stock and a 5 percent convertible bond issue in the face amount of $10,000,000.Interest payment dates of the bond issue are June 30 and December 31.The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of $20 par value common stock in exchange for each $1,000 bond.On June 30,2014,the holders of $1,800,000 face value bonds exercised the conversion privilege.The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35.The total unamortized bond discount at the date of conversion was $500,000.What amount should Bridge credit to the account "Paid-In Capital in Excess of Par" as a result of this conversion assuming Bridge does not want to recognize any gain (or loss)on the conversion?