Question

(Comprehensive Problem: Issuance, Classification, Reporting) The following are four independent situations.

(a) On March 1, 2018, Wilke Co. issued at 103 plus accrued interest \(4,000,000, 9% bonds. The bonds are dated January 1, 2018, and pay interest semiannually on July 1 and January 1. In addition, Wilke Co. incurred \)27,000 of bond issuance costs. Compute the net amount of cash received by Wilke Co. as a result of the issuance of these bonds.

(b) On January 1, 2017, Langley Co. issued 9% bonds with a face value of \(700,000 for \)656,992 to yield 10%. The bonds are dated January 1, 2017, and pay interest annually. What amount is reported for interest expense in 2017 related to these bonds, assuming that Langley used the effective-interest method for amortizing bond premium and discount?

(c) Tweedie Building Co. has a number of long-term bonds outstanding at December 31, 2017. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.

	Sinking Fund	Maturities
2018	\(300,000	\)100,000
2019	100,000	250,000
2020	100,000	100,000
2021	200,000	-
2022	200,000	150,000
2023	200,000	100,000

Indicate how this information should be reported in the financial statements at December 31, 2017.

(d) In the long-term debt structure of Beckford Inc., the following three bonds were reported: mortgage bonds payable \(10,000,000; collateral trust bonds \)5,000,000; bonds maturing in installments, secured by plant equipment $4,000,000. Determine the total amount, if any, of debenture bonds outstanding

Short answer

1. Net cash received by Wilke Co is $4,153,000.
2. Interest expenses reported on 31 Dec 2017 $65,699.
3. The sinking fund and the maturities will be classified as long-term debt in the financial statement of the business entity.
4. None of the bonds held by the business entity will be classified as debenture bonds.

Step-by-step solution

Definition of Bond Amortization

A method used by the business entity to spread the discount or the premium on the bonds payable over its life is known as bond amortization.

Calculation of net cash received by Wilke Co

Particular	Amount $
The selling price of the bonds is 103% of $4,000,000	$4,120,000
Add: accrued interest$\left(\$4,000,000\times 9\%\times \frac{2}{12}\right)$	60,000
	4,180,000
Less: issuance cost of bonds	(27,000)
Net cash received	$4,153,000

Interest expenses reported in 2017

Bond amortization schedule:

Date	Interest payment at the stated rate on face value (9%)	Interest expenses at the market rate on the previous year book value (10%)	Amortized discount	Unamortized discount	Bond payable	Book value of bond payable
1 Jan 2017				$43,008	$700,000	$656,992
31 Dec 2017	$63,000	$65,699	$2,699	$40,309	$700,000	$659,691

Reporting information in the financial statement

The business entity will report maturity and sinking funds as a long-term liability. The business entity must report the following amounts in the financial statement:

Year	Amount $
2018$\left(\$300,000+\$100,000\right)$	$400,000
2019$\left(\$250,000+\$100,000\right)$	$350,000
2020$\left(\$100,000+\$100,000\right)$	$200,000
2021$\left(\$200,000+\$0\right)$	$200,000
2022$\left(\$200,000+\$150,000\right)$	$350,000
2023$\left(\$200,000+\$100,000\right)$	$300,000

Total amount of debenture outstanding

All of the bonds of the company are secured by the real estate and the plant and equipment of the company. Therefore, the business entity will not classify any of its bonds as debenture bonds.