Chapter 14: 14-27Q_b (page 753)
(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?
The concession that the creditor might grant in a troubled-debt situation is to diminish the face amount of the obligation.
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Lady Gaga Co. recently made an investment in the bonds issued by Chili Peppers Inc. Lady Gaga’s business model for this investment is to profit from trading in response to changes in market interest rates. How should this investment be classified by Lady Gaga? Explain.
Question: Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?
Question: What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?
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.
What are the two methods of amortizing discount and premium on bonds payable? Explain each.
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