Chapter 14: Q2CE (page 768)
What guidance does the Codification provide on the disclosure of long-term obligations?
The combined total amount of maturityand sinking fund requirementsshould be disclosed.
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Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?
(Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)
Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?
E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.
(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.
(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)
(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.
(d) Amounts withheld from employees’ wages for income taxes.
(e) Notes payable due January 15, 2020.
(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.
(g) Bonds payable of \)2,000,000 maturing June 30, 2018.
(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)
(i) Deposits made by customers who have ordered goods.
Instructions
Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.
(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
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