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Chapter 14 Bonds and Long-Term Notes
AICPA: FN Measurement
165. Required: Determine the gain or loss that Health Foods would have reported in its 2016
income statement if it had redeemed (and retired) the debentures at fair value at the end of the
fiscal year.
166. Required: Suppose that half of the bondholders had converted them into Health Foods’ stock
at the end of the 2016 fiscal year when the stock price is $90 per share. What gain or loss from
this conversion would Health Foods have recorded on the transaction using the book value
method? The market value method?
167. On August 1, 2017, United Corporation issued $10 million of 8% convertible bonds at 105.
The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock
warrants, each of which entitled the bondholder to purchase, for $50, one share of United $5
par common stock. World Company purchased 10% of the bond issue. On August 1, 2017, the
market value per share for United stock was $56 and the market value of each warrant was $6.
In March 2023, when United common stock had a market price of $70 per share and the
Chapter 14 Bonds and Long-Term Notes
unamortized premium balance was $300,000, World exercised the warrants it held.
Required:
1. Prepare the journal entries on August 1, 2017, to record (A) the issuance of the bonds by
United and (B) the investment by World.
2. Prepare the journal entries for both companies in March 2023 to record the exercise of the
warrants.
Answer:
168. On January 1, 2015, Slug Corporation issued $6 million of 8%, 10-year convertible bonds at
102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible
into 40 shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an
investment. On July 1, 2019, Fuzz converted all of its bonds into common stock of Slug. The
market price per share for Slug was $32 at the time of the conversion. Both companies use the
straight-line method for amortization.
Required:
1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books.
2. Prepare the journal entries for the conversion on the books of the issuer and the investor.
169. The December 31, 2015, balance sheet of Ming Inc. included 12% bonds with a face amount
of $100 million. The bonds were issued in 2005 and had a remaining discount of $3,400,000
at December 31, 2015. On January 1, 2016, Ming called the bonds at a price of 102.
Required: Prepare the journal entry by Ming to record the retirement of the bonds on January
1, 2016.
170. On January 1, 2016, Whittington Stoves issued $800 million of its 8% bonds for $736 million.
The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and
December 31. Whittington records interest at the effective rate and elected the option to report
these bonds at their fair value. One million dollars of the increase in fair value was due to a
change in the general (risk-free) rate of interest. On December 31, 2016, the fair value of the
bonds was $752 million as determined by their market value on the NYSE.
Required:
1. Prepare the journal entry to record interest on June 30, 2016 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2016 (the second interest
payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the
December 31, 2016, balance sheet.
Answer:
171. On January 1, 2016, BBX issued $400,000 of its 8% bonds for $368,000. The bonds were
priced to yield 10%. Interest is payable semiannually on June 30 and December 31. BBX
records interest at the effective rate and elected the option to report these bonds at their fair
value. On December 31, 2016, the fair value of the bonds was $370,000 as determined by their
market value on the NYSE. $1,000 of the change in fair value was due to a change in the
general (risk-free) rate of interest.
Required:
1. Prepare the journal entry to record interest on June 30, 2016 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2016 (the second interest
payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the
December 31, 2016, balance sheet.
172. On January 1, 2016, Ouachita Airlines issued $400,000 of its 20-year, 8% bonds. The bonds
were priced to yield 10%. Interest is payable semiannually on June 30 and December 31.
Ouachita Airlines records interest at the effective rate and elected the option to report these
bonds at their fair value. On December 31, 2016, the fair value of the bonds was $335,000 as
determined by their fair value in the over-the-counter market. None of the change in fair value
was due to a change in the general (risk-free) rate of interest.
Required:
1. Determine the price of the bonds at January 1, 2016, and prepare the journal entry to
record their issuance. Show calculations.
2. Prepare the journal entry to record interest on June 30, 2016 (the first interest payment).
Show calculations.
3. Prepare the journal entry to record interest on December 31, 2016 (the second interest
payment). Show calculations.
4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the
December 31, 2016, balance sheet. Show calculations.
Chapter 14 Bonds and Long-Term Notes
173. On May 1, 2016, Green Corporation issued $1,000,000 of 12% bonds, dated January 1, 2016,
for $975,000 plus accrued interest. The bonds mature on December 31, 2030, and pay interest
semiannually on June 30 and December 31. Green's fiscal year ends on December 31 each
year.
Required:
1. Determine the amount of accrued interest that was included in the proceeds received from
the bond sale. Show calculations.
2. Prepare the journal entry for the issuance of the bonds.
Chapter 14 Bonds and Long-Term Notes
174. At January 1, 2016, ICN, Inc., was indebted to First Bank under a $480,000, 10% unsecured
note. The note was signed January 1, 2012, and was due December 31, 2017. Annual interest
was last paid on December 31, 2014. ICN was experiencing severe financial difficulties and
negotiated a restructuring of the terms of the debt agreement. First Bank agreed to reduce last
year’s interest and the remaining two years’ interest payments to $23,110 each and delay all
payments until December 31, 2017, the maturity date.
Required:
Prepare the journal entries by ICN, Inc., necessitated by the restructuring of the debt at (A)
January 1, 2016, (B) December 31, 2016, and (C) December 31, 2017.
175. At January 1, 2016, BB Industries, Inc., owed Second Bank $24 million, under a 10%
note due December 31, 2017. Interest was paid last on December 31, 2014. BB was
experiencing severe financial difficulties and asked Second Bank to modify the terms
of the debt agreement. After negotiation Second Bank agreed to:
• Forgive the interest accrued for the year just ended,
• Reduce the remaining two years’ interest payments to $2 million each and delay the first
payment until December 31, 2017, and
• Reduce the principal amount to $22 million.
Required:
Prepare the journal entries by BB Industries, Inc. necessitated by the restructuring of the debt
at (A) January 1, 2016, (B) December 31, 2017, and (C) December 31, 2018.
176. At January 1, 2016, TD owed First Bank $300,000, under an 11% note with three years
remaining to maturity. Due to financial difficulties, TD was unable to pay the previous year's
interest. First Bank agreed to settle TD’s debt in exchange for land having a fair value of
$225,000. TD purchased the land in 2012 for $162,000.
Required:
Prepare the journal entry(s) to record the restructuring of the debt by TD.
177. On January 1, 2016, Fowl Products issued $80 million of 6%, 10-year convertible bonds at a
net price of $81.6 million. Fowl recently issued similar, but nonconvertible, bonds at 99 (that
is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000
bond is convertible into 30 shares of Fowl’s no par common stock. Fowl records interest by
the straight-line method.
On June 1, 2018, Fowl notified bondholders of its intent to call the bonds at face value plus
a 1% call premium on July 1, 2018. By June 30 all bondholders had chosen to convert their
bonds into shares as of the interest payment date. On June 30, Fowl paid the semiannual
interest and issued the requisite number of shares for the bonds being converted.
Required:
1. Prepare the journal entry for the issuance of the bonds by Fowl.
2. Prepare the journal entry for the June 30, 2016, interest payment.
3. Prepare the journal entries for the June 30, 2018, interest payment by Fowl and the
conversion of the bonds (book value method).
Chapter 14 Bonds and Long-Term Notes
Requirement 3
178. Comet Products prepares its financial statements according to International Financial
Reporting Standards (IFRS). On January 1, 2016, Comet Products issued $80 million of 6%,
10-year convertible bonds at a net price of $81.6 million. Comet recently issued similar, but
nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30
and December 31. Each $1,000 bond is convertible into 30 shares of Comet’s no par common
stock. Comet records interest by the straight-line method.
On June 1, 2018, Comet notified bondholders of its intent to call the bonds at face value
plus a 1% call premium on July 1, 2018. By June 30 all bondholders had chosen to convert
their bonds into shares as of the interest payment date. On June 30, Comet paid the semiannual
interest and issued the requisite number of shares for the bonds being converted.
Required:
1. Prepare the journal entry for the issuance of the bonds by Comet.
2. Prepare the journal entry for the June 30, 2016, interest payment.
3. Prepare the journal entries for the June 30, 2018, interest payment by Comet and the
conversion of the bonds (book value method).
Answer:
Chapter 14 Bonds and Long-Term Notes
179. On February 28, 2016, Pujols Industries issued 10% bonds, dated January 1, with a face
amount of $48 million. The bonds were priced at $42 million (plus accrued interest) to yield
12%. Interest is paid semiannually on June 30 and December 31. Pujols’ fiscal year ends
October 31.
Required:
1. What would be the amount(s) related to the bonds Pujols would report in its balance sheet
at October 31, 2016?
2. What would be the amount(s) related to the bonds that Pujols would report in its income
statement for the year ended October 31, 2016?
3. What would be the amount(s) related to the bonds that Pujols would report in its statement
of cash flows for the year ended October 31, 2016?
Chapter 14 Bonds and Long-Term Notes
Chapter 14 Bonds and Long-Term Notes
Essay
Instructions:
The following answers point out the key phrases that should appear in students' answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
180. Distinguish between:
(a) Secured and unsecured bonds.
(b) Coupon and registered bonds.
181. Distinguish between:
(a) Convertible and callable bonds.
(b) Serial and term bonds.
Chapter 14 Bonds and Long-Term Notes
182. What is meant by the "market rate" of interest, the "effective rate" of interest, and the "yield
rate" of interest?
183. Why do companies find the issuance of convertible bonds to be an attractive form of
financing?
184. How should bond issue costs be accounted for on the books of the issuing corporation?
185. A zero-coupon bond pays no interest. Explain.
Chapter 14 Bonds and Long-Term Notes
186. How are bonds and notes the same? How do they differ?
187. A disclosure note in the annual financial statements of Macy’s Inc. included the following:
“Future maturities of long-term debt, other than capitalized leases and premium on
acquired debt, are shown below:”
For how many years subsequent to the current year must Macy’s report these amounts?
Name at least two other items that must be disclosed for a company’s long-term debt.
188. In its 2016 annual report to shareholders, Bare Sturns Group Inc. disclosed the following:
On October 28, 2016, the Company issued $475,000,000 aggregate principal amount of 9-
Chapter 14 Bonds and Long-Term Notes
1/4% Senior Notes Due 2021 ("Senior Notes") and $618,670,000 aggregate principal amount
at maturity of 10-1/4% Senior Discount Notes Due 2021 ("Senior Discount Notes" and
collectively the "Notes") in a transaction not registered under the Securities Act in reliance
upon an exemption from the registration requirements of the Securities Act. Gross proceeds
from the offering amounted to $850,000,000. The discount on the Senior Discount Notes is
being accreted under the effective interest method.
Explain the last sentence of the disclosure to clarify what accounting was necessary and why.
189. List at least three ways that bonds may be taken off the market prior to maturity.
190. Tru Fashions has bonds outstanding during a year in which the market rate of interest has
declined. If Tru has elected the fair value option for the bonds, will it report a gain or a loss on
the bonds for the year? Explain.
191. Heidi Baby Products issued 8% bonds with a face amount of $320 million on January 1, 2016.
The bonds sold for $300 million. For bonds of similar risk and maturity the market yield was
9%. Upon issuance, Heidi elected the option to report these bonds at their fair value. On June
30, 2016, the fair value of the bonds was $310 million as determined by their market value on
the NASDAQ. Will Heidi report a gain or will it report a loss when adjusting the bonds to fair
value? If the change in fair value is attributable to a change in the general (risk-free) interest
rate, did the rate increase or decrease? If the change in fair value is attributable to a change in
the general (risk-free) interest rate, is the gain or loss reported as part of net income? Explain.
192. How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with
respect to accounting for convertible debt?
