Chapter 14 Power Point Notes Flashcards
Interest Expense
the effective interest rate times the amount of the debt outstanding during the period.
Debenture Bond
secured by the “full faith and credit” of company.
Mortgage Bond
secured by lien on specific real estate owned by the issuer
Coupon Bond
pays interest when investor submits attached coupon.
Callable Bond
allows company to buy back outstanding bonds prior to maturity.
Buyer JE for a N/P on a purchase of Machinery
Machinery 666,633
Discount on note payable 33,367
Notes payable 700,000
Buyer JE for interest on N/P for the purchase of machinery
Interest expense 46,664
Discount on note payable 4,664
Cash 42,000
Seller JE for a N/P on a sale of Machinery
Notes receivable 700,000
Discount on notes receivable 33,367
Sales revenue 666,633
Seller JE for interest for a N/P on a sale of Machinery
Cash 42,000
Discount on notes receivable 4,664
Investment revenue 46,664
Interest Payments on bonds equal
Stated Rate X Face Value
Interest Expense on bonds equal
Market Rate X Carrying Value
Bonds issued at par
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
Bonds issued at a discount
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
Bonds issued at a premium
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
JE for bonds issued between interest dates
Dr. Cash (99 plus 2) 101
Cr. Bonds Payable 99
Cr. Interest Payable 2
Warrants
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
Called Bonds at a Loss
Dr. Bond Payable 97,000
Dr. Loss on debt ext. 5,000
Cr. Cash 102,000
Off-balance-sheet financing
Non-consolidated entities (own less than 50% e.g., joint venture)
SPEs (entity created to perform a special project)
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.
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
