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240) On May 1, 2018, Green Corporation issued $1,000,000 of 12% bonds, dated January 1,
2018, for $975,000 plus accrued interest. The bonds mature on December 31, 2032, 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.
241) At January 1, 2018, ICN, Inc., was indebted to First Bank under a $480,000, 10%
unsecured note. The note was signed January 1, 2014, and was due December 31, 2019. Annual
interest was last paid on December 31, 2016. 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, 2019, the maturity date.
Required:
Prepare the journal entries by ICN, Inc., necessitated by the restructuring of the debt at (A)
January 1, 2018, (B) December 31, 2018, and (C) December 31, 2019.
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242) At January 1, 2018, BB Industries, Inc., owed Second Bank $24 million, under a 10% note
due December 31, 2019. Interest was paid last on December 31, 2016. 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, 2019, 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, 2018, (B) December 31, 2019, and (C) December 31, 2020.
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243) At January 1, 2018, 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 2014 for $162,000.
Required:
Prepare the journal entry(s) to record the restructuring of the debt by TD.
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244) On January 1, 2018, 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, 2020, Fowl notified bondholders of its intent to call the bonds at face value plus a 1%
call premium on July 1, 2020. 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, 2018, interest payment.
3. Prepare the journal entries for the June 30, 2020, interest payment by Fowl and the
conversion of the bonds (book value method).
245) Comet Products prepares its financial statements according to International Financial
Reporting Standards (IFRS). On January 1, 2018, 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, 2020, Comet notified bondholders of its intent to call the bonds at face value plus a
1% call premium on July 1, 2020. 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, 2018, interest payment.
3. Prepare the journal entries for the June 30, 2020, interest payment by Comet and the
conversion of the bonds (book value method).
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246) On February 28, 2018, 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, 2018?
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, 2018?
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, 2018?
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147
247) Willie Winn Track Shoes acquired a machine from Betty Will Corporation. Betty Will
completed construction of the machine on January 1, 2018. In payment for the $12 million
machine, Willie Winn issued a 5-year installment note to be paid in five equal payments at the
end of each year. The payments include interest at the rate of 10%.
Required:
1. Prepare the journal entry for Willie Winn’s purchase of the machine on January 1, 2018.
2. Prepare the journal entry for the first installment payment on December 31, 2018. Show
calculations.
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248) On January 1, 2018, Virginia Beach Industries issued $400,000 of 9%, 10-year convertible
bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is
convertible into 30 shares of Beach’s no par common stock. Bonds that are similar in all respects,
except that they are nonconvertible, currently are selling at a price to yield a market (effective)
rate of 10%. Beach prepares its financial statements using IFRS.
Required:
1. Prepare the journal entry for the issuance of the bonds by Beach. Show calculations.
2. Prepare the journal entry to record interest on June 30, 2018. (the first interest payment)
assuming Beach records interest at the effective rate. Show calculations.
3. Prepare the journal entry to record interest on December 31, 2018. (the second interest
payment). Show calculations.
4. If Beach follows U. S. GAAP, how would the bonds be recorded differently? Show the
journal entry.
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249) Distinguish between:
(a) Secured and unsecured bonds.
(b) Coupon and registered bonds.
250) Distinguish between:
(a) Convertible and callable bonds.
(b) Serial and term bonds.
150
251) What is meant by the “market rate” of interest, the “effective rate” of interest, and the “yield
rate” of interest?
252) Why do companies find the issuance of convertible bonds to be an attractive form of
financing?
253) How should bond issue costs be accounted for on the books of the issuing corporation?
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254) A zero-coupon bond pays no interest. Explain.
255) How are bonds and notes the same? How do they differ?
256) 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.
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257) In its 2018 annual report to shareholders, Bare Sturns Group Inc. disclosed the following:
On October 28, 2018, the Company issued $475,000,000 aggregate principal amount of 9-1/4%
Senior Notes Due 2023 (“Senior Notes”) and $618,670,000 aggregate principal amount at
maturity of 10-1/4% Senior Discount Notes Due 2023 (“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.
258) List at least three ways that bonds may be taken off the market prior to maturity.
259) 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.
260) Heidi Baby Products issued 8% bonds with a face amount of $320 million on January 1,
2018. 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, 2018, 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.
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261) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with
respect to accounting for convertible debt?