Question 1

Bonds are frequently issued at amounts greater or less than face value. Describe how the market rate of interest, relative to the contractual rate of interest, affects the selling price of bonds.

Accepted Answer

The answer of Bonds are frequently issued at amounts greater...

Question 2

Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31, 2014. The terms call for semi-annual installment payments of £144,435.The entry to record the first installment payment will include

Accepted Answer

The answer of Whitmore Corporation Issues a £1,800,000, 10%, 10-year...

Question 3

In general, what are the requirements for the financial statement presentation of long-term liabilities?
(b) What ratios may be computed to evaluate a company's liquidity and solvency?

Accepted Answer

The answer of In general, what are the requirements for...

Question 4

Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption.

Accepted Answer

The answer of Bonds may be redeemed (retired) before maturity...

Question 5

Finney Company borrowed €1,600,000 from BankTwo on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of €416,698 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2014?
A) €1,600,000
B) €1,045,458
C) €1,335,302
D) €1,296,000

Accepted Answer

The answer of Finney Company borrowed €1,600,000 from BankTwo on...

Question 6

Maria Gomez is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Maria is saying?

Accepted Answer

The answer of Maria Gomez is discussing the advantages of...

Question 7

Selected data from 2014 financial statements of Xi Corporation include the following (amount in millions):  The debt to assets ratio is

Accepted Answer

The answer of Selected data from 2014 financial statements of...

Question 8

Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying value of the bond was ¥59,780,000. The entry to record the retirement would include a

Accepted Answer

When a company retires bonds, if the carrying value of the bonds exceeds the amount paid to retire them, the company incurs a loss on bond redemption. In this case, the carrying value of the bonds was ¥59,780,000, but the company paid only ¥58,800,000 (98% of ¥60,000,000) to retire them. Therefore, the company incurs a loss on bond redemption of ¥980,000 (¥59,780,000 - ¥58,800,000). Thus, the entry to record the retirement would include a loss on bond redemption of ¥980,000.

Question 9

(Ethics)
Wishbone Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system.
Required:
Is it ethical for a company to have a secret system like the one described? Explain.

Accepted Answer

The answer of (Ethics)
Wishbone Company maintains two separate accounts payable...

Question 10

The adjusted trial balance for Beneteau Corporation at the end of the 2014 included the following accounts:  The total non-current liabilities reported on the statement of financial position at December 31, 2014 are

Accepted Answer

The answer of The adjusted trial balance for Beneteau Corporation...

Question 11

On January 1, 2014, Michelin Company, a calendar-year company, is issued €9,000,000 of mortgage notes payable, of which €3,000,000 is due on January 1 for each of the next three years. The proper statement of financial position presentation on December 31, 2014, is

Accepted Answer

The answer of On January 1, 2014, Michelin Company, a...

Question 12

Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $3,112,350. The entry to record the redemption will include

Accepted Answer

When a bond is redeemed, the carrying value (book value) of the bonds is compared to the redemption price to determine if there is a gain or loss on bond redemption. In this case, the carrying value of the bonds is greater than the redemption price, which means there is a loss on bond redemption. Therefore, choice B, a debit of £37,650 to Loss on Bond Redemption, is the correct entry to record the redemption. The other choices do not reflect the correct accounting treatment for bond redemption.

Question 13

(Communication)
Susan Jones works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Diane Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Lifeline's were issued at a premium. Diane sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was and the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Lifeline Books.
Required:
Draft a short note for Susan to send to Diane. Explain how such a result could occur.

Accepted Answer

The answer of (Communication)
Susan Jones works for Trend Press, a...

Question 14

Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of ₤500,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization. Herman Company decided to redeem the bonds on January 1, 2014. What amount of gain or loss would Herman report on its 2014 income statement?

Accepted Answer

To calculate the gain or loss, we need to compare the carrying value of the bonds on the redemption date (January 1, 2014) with the call price of 101.

The bonds were issued on January 1, 2012, and have a 10-year life, which means they would mature on December 31, 2021. Therefore, on January 1, 2014, they would have been outstanding for 2 years (4 semi-annual periods).

The face value of the bonds is ₤500,000, and they pay an 8% annual interest, which means a semi-annual interest payment of ₤20,000. The total interest paid during the 2-year period would be 4 x ₤20,000 = ₤80,000.

The bonds were issued at a discount, which means their carrying value would have been less than the face value. The discount was ₤28,750 (₤500,000 - ₤471,250). We know from the problem statement that Herman uses the straight-line method of amortization, which means the discount is amortized evenly over the life of the bonds.

The annual amortization amount is ₤28,750 / 10 = ₤2,875. The semi-annual amortization amount is therefore ₤1,437.50.

On June 30, 2013, Herman would have recorded an amortization expense of ₤1,437.50 and an interest expense of ₤20,000. The interest expense is calculated based on the carrying value of the bonds on that date, which is the initial carrying value less the amortization to date.

Initial carrying value: ₤471,250 
Amortization to date: ₤1,437.50 
Carrying value on June 30, 2013: ₤469,812.50

Interest expense: 8% x ₤469,812.50 = ₤37,584.

On December 31, 2013, Herman would have recorded the same amounts of amortization and interest expense.

Therefore, on January 1, 2014, the carrying value of the bonds would have been:

Initial carrying value: ₤471,250 
Total amortization: 4 x ₤1,437.50 = ₤5,750 
Carrying value on January 1, 2014: ₤465,500

To redeem the bonds, Herman would have to pay the call price of 101, which is ₤505,000.

Comparing the carrying value with the call price, we get:

Carrying value on January 1, 2014: ₤465,500 
Call price: ₤505,000

Herman would therefore report a loss of ₤39,500 (₤505,000 - ₤465,500) on the redemption of the bonds.

Quiz 10: Reporting and Analyzing Liabilities