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Chapter 14: 24Q (page 753)
What are some forms of off-balance-sheet financing?
Some forms of off-balancesheet financing comprise operating leases, utilization of special purpose entities, and investments in disjointed subsidiaries.
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(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.
Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.
(Round answers to the nearest cent.)
(a) December 31, 2016. (d) December 31, 2019.
(b) December 31, 2017. (e) December 31, 2020.
(c) December 31, 2018.
Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.
Instructions
(Entries and Questions for Bond Transactions) On June 30, 2017, Mischa Auer Company issued \(4,000,000 face value of 13%, 20-year bonds at \)4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semi-annual interest on June 30 and -December 31.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on June 30, 2017.
(2) The payment of interest and the amortization of the premium on December 31, 2017.
(3) The payment of interest and the amortization of the premium on June 30, 2018.
(4) The payment of interest and the amortization of the premium on December 31, 2018.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet.
(c) Provide the answers to the following questions.
(1) What amount of interest expense is reported for 2018?
(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?
Lady Gaga Co. recently made an investment in the bonds issued by Chili Peppers Inc. Lady Gaga鈥檚 business model for this investment is to profit from trading in response to changes in market interest rates. How should this investment be classified by Lady Gaga? Explain.
On January 2, 2012, Banno Corporation issued \(1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable 鈥渋nterest method.鈥�)
The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Banno called \)900,000 face amount of the bonds and redeemed them.
Instructions
Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.
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