Chapter 4.2
FAR416613
On November 1, 20X1, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1, 20X1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31, 20X1, balance sheet?
Interest payable is the amount of interest due to the bondholder from the date of last payment of interest (October 1, 20X1) till the year end (December 31, 20X1), irrespective of the date of issue of the bond (November 1, 20X1). Interest payable = Face value x Stated interest rate x period since last payment = $8,00,000 x 8% x 3/12= $16,000.
FAR416253
The following information relates to non-current investments that Fall Corp. placed in trust as required by the underwriter of its bonds:
What amount should Fall report in its December 31, 20X2, balance sheet related to its non-current investment for bond sinking fund requirements?
Bond sinking fund is treated as non-current asset (long-term investment) until bond matures. Investment account increases with any additional investments, interest income or dividends earned on investment and decreases with any costs incurred on such investment. The carrying amount of the bonds payable is not relevant to the balance of the sinking fund. Balance sheet of Fall as on December 31, 20X2 would report non-current investment for bond sinking fund at $580,000.
Bond sinking fund balance, 12/31/X1 $450,000
Add 20X2 additional investment 90,000
Add Dividends on investments 15,000
Add Interest revenue 30,000
Less Administration costs 5,000
Total Non-current investment for bond sinking fund $580,000
FAR416259
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An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund:
I. Increases by revenue earned on the investments.
II. Is not affected by revenue earned on the investments.
III. Decreases when the investments are purchased.
When cash is transferred to a sinking fund account, the sinking fund balance increases for the amount of cash transferred. When this cash is used to purchase investments, there is no effect in the balance of sinking fund, only the composition changes - cash becomes investments or a current asset becomes a non-current asset. Revenue earned on the investments is reported as income in the income statement and is added to the sinking fund account. Therefore, the sinking fund increases with the the revenue earned on investments and is not affected when investments are purchased.
FAR416266
A 15-year bond was issued in Yr0 at a discount. During Yr10, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Yr10 bond transactions was to increase long-term liabilities by the excess of the 10-year bond's face amount over the 15-year bonds:
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When a bond issued at discount is retired early, the carrying value of the bond will be less than its face value. The company will recognize a loss for the difference between the face value paid at the time of retirement and the carrying value of the bond. Retirement of the bond will decrease the bonds payable liability (at face value) and cancel the unamortized discount. The net effect in reduction of liability is bond at face value - unamortized discount = bond at carrying value. The issuance of the 10-year bond at face value will increase long-term liabilities to the amount at face value. The entry to record the transaction would be:
15-year bonds payable (old at face value) xxx
Loss on early retirement xxx
The net effect on long term liability = 10 year bonds payable at face - 15 year bonds payable at carrying value.
10-year bonds payable (new at face value) xxx
Unamortized discount (old) xxx
FAR416277
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Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?
I. Less than warrants' market value.
II. Contributed capital.
When bonds are issued with detachable stock purchase warrants, the proceeds are allocated between the bonds and the warrants with the amount allocated to the warrants is recorded in additional paid-in capital (APIC). Thus, the amount allocated to warrants is recorded as contributed capital. The proceeds are allocated in the ratio of the relative fair market values of the bonds and the warrants. Since the aggregate market value of those securities exceeds the proceeds, the amount allocated to each security, in proportion of the market value, would be lower than its actual market value.
FAR240019
`Annuity due.
- Series of payments/receipts that occur at beginning of the period.
An annuity due (annuity in advance) represents a series of payments made or received at the beginning of the period.
Imputed interest rate.
- Represents the debtor.
An imputed interest rate is used when the rate on a note is not fair and the fair value of the items being exchanged is not readily determinable. An imputed interest rate represents the rate at which the debtor could obtain financing from a different source: this is known as the debtor's incremental borrowing rate.