Chapter 14 Power Point Notes Flashcards

1
Q

Interest Expense

A

the effective interest rate times the amount of the debt outstanding during the period.

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2
Q

Debenture Bond

A

secured by the “full faith and credit” of company.

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3
Q

Mortgage Bond

A

secured by lien on specific real estate owned by the issuer

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4
Q

Coupon Bond

A

pays interest when investor submits attached coupon.

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5
Q

Callable Bond

A

allows company to buy back outstanding bonds prior to maturity.

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6
Q

Buyer JE for a N/P on a purchase of Machinery

A

Machinery 666,633
Discount on note payable 33,367
Notes payable 700,000

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7
Q

Buyer JE for interest on N/P for the purchase of machinery

A

Interest expense 46,664
Discount on note payable 4,664
Cash 42,000

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8
Q

Seller JE for a N/P on a sale of Machinery

A

Notes receivable 700,000
Discount on notes receivable 33,367
Sales revenue 666,633

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9
Q

Seller JE for interest for a N/P on a sale of Machinery

A

Cash 42,000
Discount on notes receivable 4,664
Investment revenue 46,664

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10
Q

Interest Payments on bonds equal

A

Stated Rate X Face Value

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11
Q

Interest Expense on bonds equal

A

Market Rate X Carrying Value

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12
Q

Bonds issued at par

A

Bond issue price exactly equals face value
This implies the coupon rate exactly equals the market rate on the day of the issue
Coupon exactly compensates the bondholder for the risk

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13
Q

Bonds issued at a discount

A

Bond issue price is below face value
This implies the coupon rate is below the market rate on the day of the issue
Coupon does not compensate the bondholder enough

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14
Q

Bonds issued at a premium

A

Bond issue price is above face value
This implies the coupon rate is above the market rate on the day of the issue
Coupon compensates the bondholder too much

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15
Q

JE for bonds issued between interest dates

A

Dr. Cash (99 plus 2) 101
Cr. Bonds Payable 99
Cr. Interest Payable 2

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16
Q

Warrants

A

give investor the option to buy a specified number of shares at a pre-set price
Dr. Cash 90
Cr. Bond Payable 88.2
Cr. Warrant (Equity) 1.8

17
Q

Called Bonds at a Loss

A

Dr. Bond Payable 97,000
Dr. Loss on debt ext. 5,000
Cr. Cash 102,000

18
Q

Off-balance-sheet financing

A

Non-consolidated entities (own less than 50% e.g., joint venture)
SPEs (entity created to perform a special project)

19
Q

Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated December 31, 2009. Because of Eddy’s financial difficulties developing in 2011, Eddy owed accrued interest of $48,000 on the note at December 31, 2011, but Cole has not yet impaired the note receivable or interest receivable.
Under a troubled debt restructuring, on December 31, 2011, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $360,000. Eddy’s acquisition cost of the land is $290,000.

Provide Eddy’s (the debtor’s) journal entry to record this transaction.

Provide Cole’s (the creditor’s) journal entry to record this transaction.

A
Eddy (the debtor)
12/31/11
Dr.  Land			70,000
	 Cr.  Gain on sale of land		70,000
Dr.  Interest Payable	48,000
Dr.  Note Payable	400,000
	Cr.	Land					360,000	
	Cr.  Gain on debt restructuring	88,000	
Cole (the creditor)
12/31/11
Dr.  Land					360,000
Dr.  Loss on debt restructuring	88,000
	Cr.  Interest receivable			48,000
	Cr.	Note receivable				400,000