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Chapter 14: Q2CE (page 768)

What guidance does the Codification provide on the disclosure of long-term obligations?

Short Answer

Expert verified

The combined total amount of maturityand sinking fund requirementsshould be disclosed.

Step by step solution

01

Meaning of long-term Liabilities

Long-term liabilities are debts owed by an organization that won't need to be paid off for at least a year. This information is separately provided to help investors, creditors, and lenders better understand a business's commitments.

02

Explaining the guidance the Codification provides on the disclosure of long-term obligations

According to FASB ASC 470-10-50-1 (Disclosure of Long-Term Obligations):

For each of the five years that follow the date of the most recent balance sheet reported, the total maturity amount and sinking fund requirements should be declared for all long-term borrowings. (Consider Section 505-10-50 for disclosure requirements that apply to securities, including debt securities.)

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Most popular questions from this chapter

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.)

Karen Austin Inc. has issued three types of debt on January 1, 2017, the start of the company鈥檚 fiscal year.

  1. \(10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
  2. \)25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
  3. $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

Part I: The appropriate method of amortizing a premium or discount on issuance of bonds is the effective-interest method.

Instructions

  1. What is the effective-interest method of amortization and how is it different from and similar to the straight-line method of amortization?
  2. How is amortization computed using the effective-interest method, and why and how do amounts obtained using the effective-interest method differ from amounts computed under the straight-line method?

Part II: Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:

  1. Amortized over remaining life of old debt.
  2. Amortized over the life of the new debt issue.
  3. Recognized in the period of extinguishment

Instructions

  1. Develop supporting arguments for each of the three theoretical methods of accounting for gains and losses from the early extinguishment of debt.
  2. Which of the methods above is generally accepted and how should the appropriate amount of gain or loss be shown in a company鈥檚 financial statements?

When is the stated interest rate of a debt instrument presumed to be fair?

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo鈥檚 books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust鈥檚 books on December 31, 2017, 2018, 2019.
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