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Chapter 14: Q11Q (page 753)

Question: What is the 鈥渃all鈥� feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?

Short Answer

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Answer

A call feature is a characteristic in the contract of bond that permits the issuer to repay bonds at a stated price within specified future time interval. The call feature has no effect on the amortization of bond premium or discount.

Step by step solution

01

Meaning of bond issue

Bond issue is a method adopted by the firms for raising money. Herein, the investor agrees to give the corporation a specified amount of money for a particular time period. In return, the investor obtains regular payment of interest.

02

“Call” feature of a bond issue

The call feature of a bond issue permits the issuer the advantage of buying, after a specified date at a aforesaid price, outstanding bonds with the motive of diminishing indebtedness or taking benefit of lesser rates of interest.

03

The way by which the call feature affects the amortization of bond premium or discount

The call feature remains unaffected by the amortization of bond discount or premium as untimely redemption is uncertain, the term of bonds is to be used for the cause of amortization.

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Most popular questions from this chapter

On January 1, 2017, JWS Corporation issued \(600,000 of 7% bonds, due in 10 years. The bonds were issued for \)559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company鈥檚 journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%

In each of the following independent cases, the company closes its books on December 31.

1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.

2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.

Instructions

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Question: Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?

Question: What is the required method of amortizing discount and premium on bonds payable? Explain the procedures.

(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information

regarding its equity investments.

December 31, 2017

Investments Cost Fair Value Unrealized Gain (Loss)

Clemson Corp. stock \(20,000 \)19,000 \((1,000)

Colorado Co. stock 10,000 9,000 (1,000)

Buffaloes Co. stock 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 (1,400)

Previous fair value adjustment balance 鈥�0鈥�

Fair value adjustment鈥擟r. \)(1,400)

During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.

stock鈥擻)19,100; Buffaloes Co. stock鈥�$20,500. None of the equity investments result in significant influence.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.
See all solutions

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