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Chapter 14: Q4CE (page 768)

A company proposes to include in its SEC registration statement a balance sheet showing its subordinate debt as a portion of stockholders鈥� equity. Will the SEC allow this? Why or why not?

Short Answer

Expert verified

No, the SEC will not allow it.

Step by step solution

01

Meaning of SEC

The United States government agency in charge of the country's securities business is the Securities and Exchange Commission (SEC). It keeps an eye on both transactions and the acts of financial experts. Its goals are to uphold fairness, integrity, and transparency; stop fraud and other dishonest behavior, and guarantee efficient and well-ordered markets.

02

Explaining whether SEC allows or not

FASB ASC 470-10-S99-2 (SAB Topic 4.A, Subordinated Debt) states the following:

It may be possible that subordinated debt won't be listed under stockholders' equity on the balance sheet. Any presentation that lists this debt as a part of stockholders' equity must be removed. Any caption that includes stockholders鈥� equity and subordinated loans must be removed.

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Most popular questions from this chapter

Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay鈥檚 Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk.

Carrying Value

Fair Value

December 31, 2017

\(54,000

\)54,000

December 31, 2018

44,000

42,500

December 31, 2019

36,000

38,000

Instructions

(a) Prepare the journal entry at December 31 (Fallen鈥檚 year-end) for 2017, 2018, and 2019, to record the fair value option for these notes.

(b) At what amount will the note be reported on Fallen鈥檚 2018 balance sheet?

(c) What is the effect of recording the fair value option on these notes on Fallen鈥檚 2019 income?

(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen鈥檚 creditworthiness has improved or declined in 2019? Explain.

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.

On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of \(500,000 for \)537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

  1. Prepare the journal entry at the date of the bond issuance.
  2. Prepare a schedule of interest expense and bond amortization for 2017鈥�2019.
  3. Prepare the journal entry to record the interest payment and the amortization for 2017.
  4. Prepare the journal entry to record the interest payment and the amortization for 2019.

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

(Amortization Schedule鈥擡ffective-Interest) Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)
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