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Exam 12: Debt Financing

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Question 21

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The total interest expense on a $300,000,10 percent,10-year bond issued at 95 would be

A) $290,000.
B) $295,000.
C) $300,000.
D) $315,000.

E) A) and C)
F) A) and B)

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Question 22

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Footnote disclosures for long-term liabilities provide information that is not conveniently presented in the balance sheet.Although detailed disclosure requirements exist for certain specialized obligations,a set of general disclosure requirements is applicable to most enterprises. Identify the general disclosure requirements for long-term liabilities.

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The following represent general disclosu...

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Question 23

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In an effort to increase sales,Sharpy Razor Blade Company inaugurated a sales promotion campaign on June 30,2014,whereby Sharpy placed a coupon in each package of razor blades sold,the coupons being redeemable for a premium.Each premium costs Sharpy $0.75,and five coupons must be presented by a customer to receive a premium.Sharpy estimated that only 60 percent of the coupons issued will be redeemed.For the six months ended December 31,2014,the following information is available: What is the estimated liability for premium claims outstanding at December 31,2014?

On January 1,2014,$50,000 of 20-year,6 percent debentures were issued for $56,275.20.Interest payment dates on the bonds are January 1 and July 1.The amount of premium to be amortized on July 1,2014,when using the straight-line method is

Assume R Company has one asset,a V Company bond that Company R purchased on the date of issuance by Company V,and one liability,one of its own bonds issued to finance the acquisition of the V Company bond.Both bond have the same terms: $1,000 face value,20-year life,and a 12% coupon rate,with interest being paid annually.Both bonds were issued at the market rate of interest of 12%. Both R Company and V Company have elected to apply the fair value option for their respective bonds as allowed under the provisions of Statement of Financial Accounting Standards No.159,"The Fair Value Option for Financial Assets and Financial Liabilities--Including an amendment of FASB Statement No.115." Required: Assume that the market rate of interest associated with both bonds decreased to 10%. 1.Explain what the financial effects this change in interest rate would have on both companies if both companies applied the FASB's fair value option.Show calculations to support your answer. 2.Assume now that A Company is required to report the bond asset at its fair value of $1,261,but is also required to report the bond liability at its historical issuance amount of $1,000.

Debt securities frequently are issued with a convertible feature that permits the holder to convert the bond certificates into a determinable number of shares of common stock at any time before the conversion privilege expires.The conversion feature offers many advantages and some disadvantages both to the issuer and the investor,however. Required: Identify the advantages of convertible debt both to the issuer and the investor.

Freddy,Inc.had outstanding 10 percent,$1,000,000 face value,convertible bonds maturing on December 31,2017.Interest is paid December 31 and June 30.After amortization through June 30,2014,the unamortized balance in the bond premium account was $30,000.On that date,bonds with a face amount of $500,000 were converted into 20,000 shares of $20 par common stock.Recording the conversion by using the carrying value of the bonds,Freddy should credit Additional Paid-In Capital for

The effective interest rate of a 10-year,8 percent,$1,000 bond issued at 103 would be approximately

On February 1,2013,SouthernGas sold $300,000,12 percent,ten-year bonds at 96 plus accrued interest.Interest is payable semiannually on June 1 and December 1.The bond issue was dated December 1,2009.On July 31,2014,$150,000 of the issue was reacquired at 95 plus accrued interest. Make the entries on the issuer's books for the sale of the bonds,the payment of interest,amortization of premium or discount,and accrual of interest,and reacquisition as needed for 2013 and 2014.Straight-line amortization is recorded at the end of the calendar year and accruals are reversed.(Round all calculations.)

Much of the dissatisfaction about Enron's accounting centered around its use of special purpose entities (SPEs,now referred to by the FASB as variable interest entities or VIEs).Enterprises such as Enron have used VIEs to avoid reporting assets and liabilities for which they are responsible,to defer the reporting of losses that have already been incurred,or to report gains that do not exist.In response both to the abuses of VIEs and to the fragmented and incomplete accounting standards regarding VIEs,the FASB has proposed a new accounting interpretation.Current accounting standards require an enterprise to include subsidiaries in which it has a controlling financial interest in its consolidated financial statements.The focus of current standards is on a parent-subsidiary relationship established through voting ownership interests.The relationship between a business enterprise and a VIE is established through other means. The proposed interpretation would explain how to identify a VIE that is not subject to control through voting ownership interests and would require each enterprise involved with such a VIE to determine whether it provides financial support to the VIE through a variable interest.If an enterprise holds a majority of the variable interests of a VIE or a significant variable interest that is greater than any other party's variable interest,then that enterprise would be the primary beneficiary and would be required to include the VIE in its consolidated financial statements. Explain what is meant by the term "variable interests."

For a liability to exist,

The issuance price of a bond does not depend on the

On January 1,2013,Ruben Products issued ten-year convertible bonds of $1,800,000 at 105.Interest is payable semiannually on June 30 and December 31 at a rate of 12 percent.On June 30,2015,the company retired bonds of $150,000 at 102 plus accrued interest.Straight-line amortization is recorded at the end of the calendar year. (1)Provide the entries required to record the issuance and retirement of the bonds. (2)Assuming that each $1,000 bond is convertible into eight shares of Ruben Products' $120 par common stock (with market value of $130),provide the entries on June 30,2015,for the two methods that may be used to record a conversion rather than a retirement of $150,000 of bonds.

Gunther Inc.purchased $400,000 of Malone Corp.ten-year bonds with a stated interest rate of 8 percent payable quarterly.At the time the bonds were purchased,the market interest rate was 12 percent.Determine the amount of premium or discount on the purchase of the bonds.

The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No.133,"Accounting for Derivatives and Hedging Activities," as part of its project on financial instruments and its effort to deal with off-balance-sheet financing. Explain what is meant by the term "off-balance-sheet financing" and give two reasons why "off-balance-sheet financing" is attractive to the management of an enterprise.

On June 1,2014,Minute Controls,Inc.issued $12,000,000 of 10 percent bonds to yield 12 percent.Interest is payable semiannually on May 31 and November 30.The bonds mature in 15 years.Minute Controls,Inc.is a calendar-year corporation. (1)Determine the issue price of the bonds.Show computations. (2)Prepare an amortization table through the first two interest periods using the effective-interest method. (3)Prepare the journal entries to record bond-related transactions as of the following dates: (a)June 1,2014 (b)November 30,2014 (c)December 31,2014 (d)May 31,2015

Bonds usually sell at a discount when

Arthur Enterprises had the following long-term debt: The total of the serial bonds amounted to

A $50,000 bond with a carrying value of $52,000 was called at 103 and retired.In recording the retirement,the issuing company should record

Selected financial data of Rodham Corporation for the year ended December 31,2014,is presented below: Common stock dividends were $120,000.The times-interest-earned ratio is