Chapter 14: 24Q (page 753)
What are some forms of off-balance-sheet financing?
Some forms of off-balancesheet financing comprise operating leases, utilization of special purpose entities, and investments in disjointed subsidiaries.
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On January 2, 2012, Banno Corporation issued \(1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”)
The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Banno called \)900,000 face amount of the bonds and redeemed them.
Instructions
Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.
Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, \(100,000
bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.
Cash Interest Bond Premium Carrying Amount
Date Received Revenue Amortization of Bonds
12/31/15 \(108,660
12/31/16 \)7,000 \(5,433 \)1,567 107,093
12/31/17 7,000 5,354 1,646 105,447
12/31/18 7,000 5,272 1,728 103,719
12/31/19 7,000 5,186 1,814 101,905
12/31/20 7,000 5,095 1,905 100,000
The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.
12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000
Fair value 106,500 107,500 105,650 103,000 100,000
Instructions
(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified
as held-to-maturity securities.
(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.
(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.
(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-
sale.
(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.
(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.
Part I: The appropriate method of amortizing a premium or discount on issuance of bonds is the effective-interest method.
Instructions
Part II: Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:
Instructions
(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information
regarding its equity investments.
December 31, 2017
Investments Cost Fair Value Unrealized Gain (Loss)
Clemson Corp. stock \(20,000 \)19,000 \((1,000)
Colorado Co. stock 10,000 9,000 (1,000)
Buffaloes Co. stock 20,000 20,600 600
Total of portfolio \)50,000 \(48,600 (1,400)
Previous fair value adjustment balance –0–
Fair value adjustment—Cr. \)(1,400)
During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.
stock—\)19,100; Buffaloes Co. stock—$20,500. None of the equity investments result in significant influence.
Instructions
(a) Prepare the adjusting journal entry needed on December 31, 2017.
(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.
(c) Prepare the adjusting journal entry needed on December 31, 2018.
Question: Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
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