Chapter 14: 14-25Q (page 753)
What are the types of situations that result in troubled debt?
The types of situations that led to troubled debt include restructurings and impairments.
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(Issuance and Redemption of Bonds; Income Statement Presentation) Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of \(3,000,000 on January 2, 2003, at a discount of \)150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.
On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.
Instructions
(a) Prepare journal entries to record the issuance of the 11% bonds and the redemption of the 9% bonds.
(b) Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.
Question: Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company’s production line
As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie’s accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some accounting research on this topic.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.
Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.
Instructions:
Prepare the journal entries to record the following.
The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2011, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements are prepared once yearly.
| Amortization Schedule | ||||
Year | Cash | Interest | Amount unamortized | Carrying value |
1/1/2011 | \(5,651 | \)94,349 | ||
2011 | \(11,000 | \)11,322 | 5,329 | 94,671 |
2012 | 11,000 | 11,361 | 4,968 | 95,032 |
2013 | 11,000 | 11,404 | 4,564 | 95,436 |
2014 | 11,000 | 11,452 | 4,112 | 95,888 |
2015 | 11,000 | 11,507 | 3,605 | 95,395 |
2016 | 11,000 | 11,567 | 3,038 | 96,962 |
2017 | 11,000 | 11,635 | 2,403 | 97,597 |
2018 | 11,000 | 11,712 | 1,691 | 98,309 |
2019 | 11,000 | 11,797 | 894 | 99,106 |
2020 | 11,000 | 11,894 | 100,000 | |
Instructions
(a) Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.
(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.
(c) Determine the stated interest rate and the effective-interest rate.
(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.
(e) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid on January 1.)
(f) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.
(Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from Plato Corporation by issuing a \(600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a \)70,000 salvage value.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entry for purchase on December 31, 2017.
(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2018.
(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.
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