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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

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Answer

By issuing bonds as well as by signing of long-term mortgages and notes.
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.
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

(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

(Issuance and Redemption of Bonds; Income Statement Presentation) Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of \(3,000,000 on January 2, 2003, at a discount of \)150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

Instructions

(a) Prepare journal entries to record the issuance of the 11% bonds and the redemption of the 9% bonds.

(b) Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.

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.

What are the two methods of amortizing discount and premium on bonds payable? Explain each.

Question: Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.

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