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Chapter 14: Q20E (page 758)

(Long-Term Debt Disclosure) At December 31, 2017, Redmond Company has outstanding three long-term debt issues. The first is a \(2,000,000 note payable which matures June 30, 2020. The second is a \)6,000,000 bond issue that matures September 30, 2021. The third is a \(12,500,000 sinking fund debenture with annual sinking fund payments of \)2,500,000 in each of the years 2019 through 2023.

Instructions

Prepare the required note disclosure for the long-term debt at December 31, 2017.

Short Answer

Expert verified

On 31 December 2017, notes disclosure for the long-term debt will be as follows:

Requirements for maturities and sinking funds:

Year

Amount $

2018

$0

2019

$2,500,000

2020

$4,500,000 ($2,000,000+$2,500,000)

2021

$8,500,000 ($6,000,000+$2,500,000)

2022

$2,500,000

Step by step solution

01

Definition of Notes to Financial Statement

The information presented at the bottom of the financial statement that provides additional information regarding the assumptions made by the accountant is known as notes to the financial statement.

02

Notes disclosure for long-term debt

(a) $2,500,000 is added to each year鈥檚 disclosure because it is an annual payment for sinking funds.

(b) $2,000,000 is added in 2020 because the note payable will mature on 30 June 2020.

(c) $6,000,000 is added in 2021 because the bond payable will mature on 30 September 2021.

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Most popular questions from this chapter

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton鈥檚 December 31, 2017, adjusting entry.

Describe the two criteria for determining the valuation of financial assets.

Distinguish between the following interest rates for bonds payable:

(a)Yield rate

(b) Nominal Rate

(c) Stated rate

(d) Market rate

(e) Effective rate

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding stock, manages the company鈥檚 operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Nina Friendly who, as a nonemployee investor, owns 40% of the stock. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita鈥檚 stock.

All of Donald鈥檚 personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won鈥檛 be able to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company鈥檚 future direction, even if it meant replacing Donald as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita鈥檚 credit rating, and will increase the company鈥檚 reported losses due to the growth in interest expense. Nina and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of 鈥渉is鈥� company, Donald is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.

Instructions

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues in this case?

(c) What would you do if you were Donald?

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.
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