ACC 360 Ch.14

On January 1, Year 1, Melas Corporation purchased a machine from Wade, Inc. by issuing a 4%, $360,000, three-year note that requires interest to be paid semiannually. The machine could have been purchased at a cash price of $340,497. Interest of $7,200 was payable semiannually on June 30 and December 31. The annual market rate of interest was determined to be 6%. What is the amount of interest that Melas will report for the six months ended June 30, Year 1?

1st int payment made on jun 30 yr1. PV of note,value of asset 340497. int exp=effective semiannual int rate X outstanding balance = 3% X 340497=10215

Which of the following statements about financial statement disclosures appropriate to long-term debt are true?

Both interest expense and interest revenue are reported among operating activities on the statement of cash flows. The fair value of financial instruments must be disclosed either in the body of the financial statements or in disclosure notes.

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $180,181, priced to yield 10%. Using the straight-line method, what is the amount of interest expense that Willette will report for the six months ended June 30, Year 1?

Semiannual interest payment = Face amount × (Stated rate ÷ 2)Semiannual interest payment = $240,000 × (6% ÷ 2) = $7,200 Allocation of discount = (Face amount of bonds − Issue price) ÷ Number of interest paymentsAllocation of discount = ($240,000 - $180,181) ÷ (10 years × 2 payments per year) = $59,819 ÷ 20 = $2,991 Interest expense recorded each interest period = Interest payment + Allocation of discountInterest expense recorded each interest period = $7,200 + $2,991 = $10,191

Barrington Corporation paid $26,000 to have bond certificates printed and engraved, $100,000 in legal fees, and $8,000 to a CPA for registration information. Barrington sold the bonds to an underwriter. The spread between the price the underwriter paid and the resale price was $230,000. What is the amount of debt issue costs?

add all together=printing cost,legal fee,CPA fees,underwriting fee=364000

subordinated debenture

bonds for which the holder is not entitled to receive any liqudation payments until the claims of other specified deft issues are satisfied

debenture bonds

bonds onlt backed only by the "full faith and credit" of the issuing corporation

convertible bonds

bonds retired as consequence of bondholders choosing to convert them into shares of stock

callable bonds

bonds that allow the issuing company to buy back outstanding bonds from the bondholder before their scheduled maturity date

sinking fund deventures

bonds that must be redeenmend on prespecified year by year basis specifiled debt issues are satisfied

Total Liabilities/shareholders'equity

debt to equity ratio

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were issued for $180,181, priced to yield 10%. What is the amount of effective interest expense that should be recorded for the six months ended June 30, Year 1?

interest exp=10%/2)X180181=9009

On January 1, Year 1, Maverick Company sold bonds that pay interest semiannually on June 30 and December 31. Maverick has a fiscal year-end of February 28. The amortization schedule for these bonds shows a cash payment of interest of $7,200 and effective interest of $9,009 relating to the interest payment that will be made on June 30, Year 1. What is the amount of interest expense that should be accrued by Maverick in an adjusting entry dated February 28, Year 1?

interest exp=9009X 2/6=3003

On January 1, Parma, Inc. borrowed $100,000 cash from First National and issued a two-year promissory note in that amount. Interest of $5,000 was payable semiannually on June 30 and December 31. Which account will be debited when Parma records the entry relating to each of the four interest payments?

interest expense

net income/total assets

return on assets

net income/shareholder'equity

return on equity

(net income + interest + taxes)/interest

time interest earned ratio