· After reading the information on accounting for long-term debt in Chapter 14 from your Intermediate Accounting text, use a Word or an Excel document to address the following problems:
o P 14-1, “Determining the Price of Bonds; Discount and Premium; Issuer and Investor,” page 817.
§ This problem tests your knowledge of bond issuance pricing.
o P 14-10, “Notes Exchanged for Assets; Unknown Effective Rate,” page 819.
§ This problem tests your knowledge of exchanging notes for assets.ï»¿
o P 14-21, “Concepts; Terminology,” page 822.
§ This problem tests your knowledge of the concepts and terminology associated with long-term debt instruments. List each of the numbers from list A, followed by the correct matching letter from list B. No calculations are necessary for this problem.
Determining the price of bonds; discount and premium; issuer and investor
On January 1, 2018, Instaform, Inc., issued 10% bonds with a face amount of $50 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 12%. Interest is paid semiannually.
1. Determine the price of the bonds at January 1, 2018, and prepare the journal entry to record their issuance by Instaform.
2. Assume the market rate was 9%. Determine the price of the bonds at January 1, 2018, and prepare the journal entry to record their issuance by Instaform.
3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.
Notes exchanged for assets; unknown effective rate
At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end.
1. The company issued a two-year, 12%, $600,000 note in exchange for a tract of land. The current market rate of interest is 12%.
2. Lambert acquired some office equipment with a fair value of $94,643 by issuing a one-year, $100,000 note. The stated interest on the note is 6%.
3. The company purchased a building by issuing a three-year installment note. The note is to be repaid in equal installments of $1 million per year beginning one year hence. The current market rate of interest is 12%.
• LO14–1 through LO14–5
Listed below are several terms and phrases associated with long-term debt. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.
- 1. Effective rate times balance
- 2. Promises made to bondholders
- 3. Present value of interest plus present value of principal
- 4. Call feature
- 5. Debt issue costs
- 6. Market rate higher than stated rate
- 7. Coupon bonds
- 8. Convertible bonds
- 9. Market rate less than stated rate
- 10. Stated rate times face amount
- 11. Registered bonds
- 12. Debenture bond
- 13. Mortgage bond
- 14. Materiality concept
- 15. Subordinated debenture
- Straight-line method
- Liquidation payments after other claims satisfied
- Name of owner not registered
- Checks are mailed directly
- No specific assets pledged
- Bond indenture
- Backed by a lien
- Interest expense
- May become stock
- Legal, accounting, printing
- Protection against falling rates
- Periodic cash payments
- Bond price