Chapter 14: Q17Q (page 753)
Question: What are the considerations in imputing an appropriate interest rate?
Answer
Considerations while imputing an appropriate interest rate:
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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
Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.
(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).
Instructions
Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)
Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.
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