Chapter 14: Q7Q (page 753)
Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
In a fixed-rate mortgage, there is a uniform rate of interest during the entire lending period. On the other hand, in a variable-rate mortgage, the rate of interest changes with time.
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Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:
d.reported as an expense in the period the bonds mature or are redeemed.
On January 1, 2017, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.
Instructions
(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.)
(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.
The following article appeared in the Wall Street Journal.
Bond Markets
Giant Commonwealth Edison Issue Hits Resale Market With \(70 Million Left Over
New york—Commonwealth Edison Co.’s slow-selling new 91 /4% bonds were tossed onto the resale market at a reduced price with about \)70 million still available from the \(200 million offered Thursday, dealers said.
The Chicago utility’s bonds, rated double-A by Moody’s and double-A-minus by Standard & Poor’s, originally had been priced at 99.803, to yield 9.3% in 5 years. They were marked down yesterday the equivalent of about \)5.50 for each $1,000 face amount, to about 99.25, where their yield jumped to 9.45%.
Instructions
What are the two methods of amortizing discount and premium on bonds payable? Explain each.
When is the stated interest rate of a debt instrument presumed to be fair?
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