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Chapter 14: Q17Q (page 753)
Question: What are the considerations in imputing an appropriate interest rate?
Answer
Considerations while imputing an appropriate interest rate:
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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.)
(Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from Plato Corporation by issuing a \(600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company鈥檚 credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a \)70,000 salvage value.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entry for purchase on December 31, 2017.
(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2018.
(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.
Question: What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?
On January 1, 2017, Nichols Company issued for \(1,085,800 its 20-year, 11% bonds that have a maturity value of \)1,000,000 and pay interest semiannually on January 1 and July 1. The following are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date.
1 | Bonds payable (maturing January 1, 2037) | \(1,000,000 |
Unamortized premium on bonds payable | 85,800 | |
Total bond liability | \)1,085,800 | |
2 | Bonds payable鈥攑rincipal (face value \(1,000,000 maturing January 1, 2037) | \) 142,050a |
Bonds payable鈥攊nterest (semiannual payment \(55,000) | 943,750b | |
Total bond liability | \)1,085,800 | |
3 | Bonds payable鈥攑rincipal (maturing January 1, 2037) | \(1,000,000 |
Bonds payable鈥攊nterest (\)55,000 per period for 40 periods) | 2,200,000 | |
Total bond liability | \(3,200,000 |
aThe present value of \)1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period
bThe present value of \(55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.
Instructions
(a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds.
(b) Explain why investors would pay \)1,085,800 for bonds that have a maturity value of only $1,000,000.
(c)Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1) The coupon or nominal rate. (2) The effective or yield rate at date of issue.
(d)If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of the issue be affected by an increase or a decrease in the market rate of interest?
When is the stated interest rate of a debt instrument presumed to be fair?
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