Unit 5 - D104

junk bond

an unsecured bond, or it's secured by a high-risk issuer.

A company originally sold 20-year bonds with a face value of $500,000 for a $20,000 discount. The bonds were held to maturity.How much will the gain be on the maturity date?

$0 If a company holds the bonds to maturity, the company does not compute any gains or losses. It will have fully amortized any premium or discount at the date the bonds mature.

A company borrows $20,000 by issuing a three-year note with a stated and effective rate of 5%. How much will the company record in the Notes Payable account upon signing the note?

$20,000 The note will be recorded at face value.

A company purchases a factory and signs a 30-year mortgage with a face value of $500,000 and a fixed interest rate of 6.75% per year. The bank is requiring 4 points upon closing. How much should be recorded in the Mortgages Payable account upon closing?

$500,000 Mortgages will be recorded at face value

On October 1, 2020, Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. What is the credit side of the journal entry to record the issuance of the bonds?

$6,000,000 Bond Payable and $240,000 to Premium on Bonds Payable The bonds are issued at a premium (at 104) of $240,000 (($6,000,000 × 1.04) - $6,000,000 = $240,000 premium). The complete journal entry at issuance is: Debit Cash $6,240,000, Credit Bond Payable $ $6,000,000, Credit Premium on Bond Payable $240,000.

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. What is the total interest expense reported on the 2017 income statement?

1,568,498 When a bond is purchased for less than the face value of the bond, the bond is "issued at a discount" of $395,855. The cash payment on the bond is $780,000 ($20,000,000 x 7.8% x 6/12). On 01/01/2017, the carrying amount of the bond is $19,604,145. Total interest expense on June 30, 2017 is $784,166 ($19,604,145 x 8% x 6/12). On June 30, the carrying value of the bond is increased (the discount is reduced) by $4,166 ($784,166 - $780,000) to $19,608,311 ($19,604,145 + $4,166). Total interest expense on December 31, 2017 is $784,332 ($19,608,311 x 8% x 6/12). Therefore, total interest expense for 2017 is $1,568,498 ($784,166 + $784,332).

What is the generally accepted method of accounting for gains or losses from the early extinguishment of debt?

A difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption Any excess of the net carrying amount over the reacquisition price is a gain from extinguishment. The excess of the reacquisition price over the net carrying amount is a loss from extinguishment. These gains or losses are reported in the period of redemption.

A hardware retailer recently purchased $1,000,000 of lawn mowers from a local manufacturer with terms 2/10, n/30. How should this transaction be reported on the balance sheet?

Accounts payable Accounts payable are balances owed for goods or services to vendors.

Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, what is the correct treatment of Wooten's contingent obligation?

As a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000 Loss contingencies, if probable and reasonably estimated, must be accrued and reported on the balance sheet. In this case, the attorney as made an estimate that is probable and reasonably estimated of $5,400,000. This amount must be accrued and reported on the financial statement. The additional $3,600,000, since it is not probable (but possible), must be disclosed in the notes to the financial statements.

How should long-term debt that matures within one year and is to be converted into stock be reported?

As noncurrent and accompanied with a note explaining the method to be used in its liquidation Long-term debt that matures within one year should be reported as a current liability, unless using noncurrent assets to accomplish redemption. If the company plans to refinance debt, convert it into stock, or retire it from a bond retirement fund, it should continue to report the debt as noncurrent. However, the company should disclose the method it will use in its liquidation.

How are accrued liabilities disclosed in the financial statements?

By appropriately classifying them as regular liabilities in the balance sheet Accrued liabilities are treated as if the expense occurred in the reporting period and are included on the balance sheet as regular liabilities.

For which type of bond does the issuer have the right to call and retire the bonds prior to maturity?

Callable bond Callable bonds give the issuer the right to call and redeem the bonds prior to maturity.

How do you determine the acid-test ratio?

Cash + Short Term Investments + Net Receivables ) / Current Liabilities

Bargain Surplus made cash sales during the month of October of $375,000. The sales are subject to a 6% sales tax that was also collected. What would be included in the summary journal entry to reflect the sale transactions?

Credit Sales Taxes Payable for $22,500 The sales were cash sales, not on account. Therefore, no entry to accounts receivable is necessary. The original entry for the sales revenue is: Debit Cash $375,000, Credit Sales Revenue $375,000. The sales tax liability of 6% of total sales revenue, or $22,500, is recorded as a separate entry. The correct journal entry to record the sales tax liability is: Debit Sales Revenue $22,500, Credit Sales Tax Payable $22,500

Current Ratio

Current Assets / Current Liabilities

A company issues a $25,000 three-year note. The stated and effective interest rates are 2%. Which journal entry should be used to record the annual interest expense at the end of the first year?

Debit Interest Expense for $500; credit Cash for $500 $500 = ($25,000 x 0.02). When the stated and effective interest rates are the same, annual interest is calculated by multiplying the face of the note times the interest rate.

A company does not segregate sales tax and the amount of sale at the time of sale. At quarter end, the company must record the sales tax. The Sales Revenue account shows a balance of $200,000, which includes 6% sales tax.Which entry should be used to record the amount due to the taxing unit?

Debit Sales Revenue for $11,321; credit Sales Taxes Payable for $11,321 $11,321 = $200,000 - ($200,000/1.06). This is the correct calculation and accounts to record this transaction.

A company issues $500,000 of bonds at 98. How should the premium or discount be recorded upon bond issuance?

Debit to Discount on Bonds Payable for $10,000 Discount is debited when the bonds are sold for less than par value. When bonds are sold for less than 100 (par value), then they are sold for a discount, which will be recorded as a debit in the debt issuance journal entry. In this instance, bonds are sold for 98% of par value, or a 2% of $500,000 discount (calculating to $10,000).

0 / 1 A company knows that certain loss contingencies should be recorded in an effort to be conservative.Which type of loss contingencies must be recorded?

Expected premiums to be awarded to customers This is both probable and can be estimated. Expected premiums to be awarded to customers should be recorded as a loss contingency.

A company has two pending lawsuits and is trying to determine if the losses should be recorded in the December 31, Year 1 financial statements. It was already determined that the outcomes will be unfavorable and can be reasonably estimated. Lawsuit A involved an event that occurred on November 28, Year 1, and Lawsuit B involved an event that occurred on January 3, Year 2 after the financial statement date, but before the issuance. Which loss contingency should be recorded by this company in Year 1?

For Lawsuit A only The event occurred before the date of the financial statement, unfavorable outcome is probable, and the amount of loss can be reasonably estimated. These situations must be present to record a loss contingency.

Times Interest Earned

Net Income + Interest Expense + Income Tax Expense / Interest Expense The times interest earned ratio indicates the company's ability to meet interest payments as they come due.

What is the numerator in the times interest earned ratio?

Net income + (interest expense + income tax expense)

A Parent Company guaranteed a $700,000 mortgage for its Subsidiary Company, which is financially solvent. What is the proper accounting treatment for this situation?

Parent Company should not record a $700,000 liability on its balance sheet but should disclose in the notes to the financial statements the nature and amount of the guarantee and the amount it can recover from outside parties if it can be estimated. Parent Company should disclose the guarantee of indebtedness in the notes to the financial statements even if the possibility of the loss is remote. Parent Company should not record a liability on the balance sheet because the Subsidiary is financially solvent.

A company redeemed bonds before the maturity date with a reacquisition price that was less than the current net carrying value. The original bond issuance was recorded at 103. Which account should be debited in the journal entry to record this transaction?

Premium on Bonds Payable Since the reacquisition price was less than the current net carrying value, the extinguishment of debt will be recorded as a gain. Additionally, since the original bond issuance was recorded at a premium of 103 and the bonds were redeemed before the maturity date, there is still a balance in the Premium account. Premiums are originally credited, so the account needs to be debited at the redemption date.

What is the interest rate written in the terms of the bond indenture known as?

Stated rate The interest rate written in the terms of the bond indenture (and often printed on the bond certificate) is known as the stated, coupon, or nominal rate.

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. What relationship can you expect to apply to the situation?

The amount of interest expense will decrease each period the loan is outstanding. Since the amount of principal due decreases as each payment is made, the amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

What does the current ratio inform you about a company?

The company's liquidity The current ratio is calculated as current assets divided by current liabilities. This ratio informs you about the liquidity of the company or the ability of the company to pay off it's current liability obligations.

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place, what is true?

The present value of the debt instrument must be approximated using an imputed interest rate. When a note is issued at zero percent, the discount is amortized using the implicit interest rate calculated by evaluating the present value of future cash flows.

Debt to Assets Ratio

Total Liabilities / Total Assets measures the percentage of the total assets provided by creditors

How is the debt to assets ratio computed?

Total liabilities / total assets

Serial bonds

kind of as the term implies-- are structured so that a portion of the bonds mature at intervals or in a series. Serial bonds are often used to finance long-term construction projects.

Convertible bond

convert a bond into shares of stock.

A mortgage bond

that's just a bond that secured with real estate

A zero-coupon bond

there's no payments made throughout the life of the bond. No interest is paid. This bond is sold usually at a discount with full face value paid at maturity.