Accounting

Question 1

Bond Issue

Answer 1

Total Amount of Bonds x $1000 or price

Question 2

Bond Indenture

Answer 2

Contract

Question 3

What are other names for face value of the bond?

Answer 3

Stated Value or Par Value

Question 4

What is the maturity date

Answer 4

The data which the principal + interest is to be repaid

Question 5

What are other names for interest rate?

Answer 5

Stated rate, coupon, nominal rate, contract

Question 6

What are other names for market rate?

Answer 6

Yield or effective rate

Question 7

Formula for Interest Expense in Effective Method

Answer 7

Carrying Value x Rate x Time = Interest Expense

Question 8

Formula for Interest in Straight Line Method

Answer 8

Discount Amount x Rate x Time = Interest Expense

Question 9

ABC issues 100 $1000 bonds on 1/1/20x1 with a stated interest rate of 10% and a maturity date of 12/31/20x8. Interest is payable semiannually on June 30 and December 31. Debt issuance costs are $2,000.

Assume the market rate of interest is 10%, what is the price of the bonds? Make journal entries to record the issuance of the bonds and the first interest payment.

Question 10

Assume the market rate of interest is 12%, what is the price of the bonds. Make journal entries to record the issuance of the bonds and the first interest payment.

Question 11

Assume the market rate of interest is 8%, what is the price of the bonds. Make journal entries to record the issuance of the bonds and the first interest payment.

Question 12

On October 31, 20x5, ABC called its $100,000, 10% bonds. The bonds were previously issued to yield 12% (see Bond Illustration Problem from last class). The indenture specified a call price of 98. ABC uses the effective interest method.
Prepare the journal entry necessary to record the extinguishment of debt.

Question 13

Convertible Bonds
On January 1, 20x2, ABC issued $200,000 of 8% convertible debentures due in ten years at 102. The bonds are convertible at the option of the holder into $1 par common stock at a conversion ratio of 40 shares per $1000 bond. ABC uses the straight-line method to amortize premiums/discounts.

Record the issuance of the bonds

Question 14

On January 1, 20x3, 1/2 of the bondholders exercised the conversion option. Use the book value method to record the conversion.

Question 15

Assume the same facts in (2) except that the company uses the market value method and the market value of the stock is $30 per share on 1/1/20x3.

Question 16

Bonds with Detachable Warrants
On January 1, 20x3 ABC issued 200 $1,000 debentures with a stated rate of 8% due in ten years at 102. Accompanying each bond were 20 warrants. Each warrant permitted the holder to buy 1 share of $1 par common stock at $20 per share. Shortly after issuance, the warrants were listed on the exchange at $3 and the bonds were quoted at 99 ex rights (without the rights attached).
Required:
1) Prepare the journal entry required at 1/1/20x3

Question 17

Assume that 1/2 of the warrants were converted on 7/1/20x3 when the common stock was trading at $45 per share.

Question 18

Assume that the stock market “crashed” in July of 20x3 and the market value per share of the common stock was $2. Therefore, the remaining warrants were allowed to expire on 1/1/20y2.

Question 19

Assume that on 1/1/20x8, ABC purchased a machine from XYZ by issuing a 12%, $700,000 note due in three years. Interest is required to be paid semi-annually. The prevailing market interest rate is 14% giving the note a present value of $666,633. Record the journal entry required at (1) the issuance of the note and (2) the first interest payment date for both ABC and XYZ. Use the effective interest method to amortize any premiums/discounts.

Question 20

On January 1, 20x8, ABC borrowed and received $400,000 from a major customer evidenced by a noninterest bearing note due in 3 years. As consideration for the noninterest-bearing feature, ABC agrees to supply the customer’s inventory needs for the loan period at a lower than market price. The appropriate rate at which to impute interest is 12% giving a present value of $284,712. Prepare the journal entry at 1/1/20x8 and 12/31/20x8. Assume that the sales of ABC’s products to the customer occur evenly over the 3 year period.

Question 21

Assume that on 1/1/20x8, ABC purchased a machine from XYZ by issuing a 12%, $700,000 installment note due in three years. Interest is required to be paid semi-annually. The prevailing market interest rate is 14% giving the note a present value of $666,633. Compute the cash payment required and record the entry required at (1) the issuance of the note and (2) the first interest payment date for ABC.
Cash Payment = _____________________________

Question 22

Assume that NBC Bank decides to transfer debt securities classified as trading securities to its available-for-sale portfolio as of 12/31/20x4. Prior to the transfer, the securities had a cost of $70,000 and a fair value of $85,000. Prepare the necessary journal entry.

Question 23

Assume, on the same date, that NBC Bank decides to transfer debt securities held as available-for-sale to its trading portfolio. At 12/31/20x4, the securities had a cost of $100,000 and a fair value of $95,000. At 12/31/20x3, the securities had a fair value of $98,000. Prepare the necessary journal entry.

Question 24

NBC decides to transfer its held-to-maturity investment to its available-for-sale portfolio. The cost and fair values at 12/31/20x4 are $80,000 and $90,000 respectively. Prepare the necessary journal entries.

Question 25

NBC decides to transfer its available-for-sale securities to its held-to-maturity portfolio. The securities originally sold at a par value of $100,000. Their fair value at 12/31/20x4 and 12/31/20x3 is $104,000 and $102,000, respectively. Prepare the necessary journal entries.

Question 26

On December 31, Brandon Inc. held debt investments that it properly classified as held- to-maturity. These investments had previously been purchased at par for $200,000 and had a current fair value of $180,000. When preparing its financial statements, Brandon concluded that expected credit losses were $12,000. What entry should be made at December 31 to report the impairment of this investment?

Question 27

AssumethesamefactsasinpartAexcepttheinvestmentisclassifiedasavailable-for- sale. What entry should be made at December 31 to report the impairment of this investment?