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Chapter 14: Q1Q (page 752)

Question: (a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture? What does it contain? (c) What is a mortgage?

Short Answer

Expert verified

Answer

  1. By issuing bonds as well as by signing of long-term mortgages and notes.
  2. A bond indenture is an agreement made in contract between the issuer of the bonds as well as the bondholders and is signed by the bond issuer.
  3. A mortgage is an agreement made between borrower and the lender that provides the right to the lender to take one’s property in case of failure of amount borrowed inclusive of interest.

Step by step solution

01

Meaning of long-term debt

Long-term debt is a debt that gets matured within a year and its treatment differs with that of the short-term debt.

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Most popular questions from this chapter

Question: What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?

Coldwell, Inc. issued a \(100,000. 4-years, 10% note at face value to Flint Hills Bank on January 1, 2017, and received \)100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

Samson Corporation issued a 4-year, \(75,000, zero-interest-bearing note to Brown Company on January 1, 2017, and received cash of \)47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

All of the following are differences between IFRS and GAAP in accounting for liabilities except:

a) When a bond is issued at a discount, GAAP records the discount in a separate contra liability account. IFRS records the bond net of the discount.

b) Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond.

c) GAAP, but not IFRS, uses the term “troubled-debt restructurings.”

d) GAAP, but not IFRS, uses the term “provisions” for contingent liabilities which are accrued.

Pierre Company has a 12% note payable with a carrying value of \(20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is \)22,600. Prepare the entry to record the fair value option for this note, assuming

(a) no change in credit risk, and

(b) the change is due to a change in credit risk.
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