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Review questions

Review questions. What is the difference between China’s accounting and American accounting when recording bond issue cost? 账户“应付利息”与“应付债券 - 应计利息”的区别 Recording implicit interest for zero coupon bonds Explain the steps for recording bonds retired prior to maturity

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Review questions

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  1. Review questions • What is the difference between China’s accounting and American accounting when recording bond issue cost? • 账户“应付利息”与“应付债券-应计利息”的区别 • Recording implicit interest for zero coupon bonds • Explain the steps for recording bonds retired prior to maturity • Explain the characteristics of Bonds issued with detachable stock warrants • Explain the relationship between common stock and additional paid-in capital on common stock

  2. A company may issue bonds that are convertible into common stock. At conversion, the bondholder exchanges the bonds for a specified number of common shares and becomes a stock holder) Convertible Bonds Why issue convertible bonds?

  3. Characteristics of convertible bonds • Debt • Equity • Convertible feature

  4. The difference between convertible bonds and Bonds issued with detachable stock warrants

  5. Book value method • The stockholder’s equity (common stock and additional paid-in capital) is recorded at the book value of the convertible bonds on the date of conversion, and no gain or loss is recorded upon conversion

  6. Market value method • The stockholders’ equity is recorded at the market value of the shares issued on the date of conversion, and a loss is recorded. The loss is computed by comparing the market value of the shares with the book value of the bonds at the time of conversion

  7. Convertible Bonds Shannon Corporation has outstanding convertible bonds with a face value of $10,000,it has just paid interest on these bonds and the bonds have a book value of 10500. Each $1,000 bond is convertible into 40 shares of common stock (par value $20 per share). All bonds are converted into common stock when the market value of Shannon’s common stock is $26.50 per share.

  8. a. 2005 July 3 Bonds Payable 500,000 Discount on Bonds Payable 7,400 Common Stock (500 x 20 x $5) 50,000 Additional Paid-in Capital from Bond Conversion 442,600 ($500,000 - $7,400 - $50,000) • 2005 July 3 Bonds Payable 500,000 Loss on Conversion of Bonds to Common Stock 27,400 Discount on Bonds Payable 7,400 Common Stock (20 x 500 x $5) 50,000 Additional Paid-in Capital from 470,000 Bond Conversion [($52 - $5) x500 x 20]

  9. Notes payable • an unconditional written agreement to pay a sum of money to the bearer on a specific date

  10. Long-term notes payable • Notes payable issued for cash • Notes payable exchanged for cash and rights or privileges • Notes payable exchanged for property, goods or services

  11. Notes payable issued for cash • interest-bearing notes payable • non-interest bearing notes payable.

  12. Example 1 On January 1, 2004, Johnson Company issues a 3-year, interest-bearing note with a face value of $8,000，12% interest rate, in exchange for cash.

  13. Non-interest note payable • When a long-term non-interest-bearing note is exchanged solely for cash, the note is assumed to have present value equal to the cash proceeds. the difference between the cash proceeds and the face value of the note is recorded as a discount and amortized over the life of the note by effective interest method

  14. 如果公司仅仅为了获取现金签发零息票据，公司就按照取得的现金作为票据的现值。公司取得的现金和票据的票面金额之间的差额被记为票据的折价，并且在票据的偿还期内用实际利率法对其进行摊销

  15. Notes Payable Issued for Cash On January 1, 2004, Johnson Company issues a 3-year, non-interest-bearing note with a face value of $8,000 and receives $5,694.24 in exchange. Cash 5,694.24 Discount on Notes Payable 2,305.76 Notes Payable 8,000.00 Contra account to Notes Payable

  16. Notes Payable Issued for Cash On December 31, 2004 Johnson Company records the interest expense on the note. (assume effective interest=12%) Interest Expense 683.31 Discount on Notes Payable 683.31 Notes payable $8,000.00 Less: Unamortized discount (2,305.76 ) Carrying value at beginning of year $5,694.24 x Effective interest rate 0.12 Entry amount $ 683.31

  17. 2004.1.1 cash 7694.68 Discount on notes payable 2305.32 Note payable 100,000 2004.12.31 Interest expense 1077.26 Discount on np 1077.26 Interest expense =7694.68x 14%=1077.26

  18. $100,000 – ($100,000 x 0.711780) Notes Payable Exchanged for Cash and Rights or Privileges Verna Company borrows $100,000 by issuing a 3-year, non-interest-bearing note to a customer. In addition, Verna Company agrees to sell inventory to the customer at a reduced price over a 5-year period. The customer agrees to purchase an equal amount of inventory over 5 year. The firm’s incremental borrowing rate is 12%. Cash 100,000.00 Discount on Notes Payable 28,822.00 Notes Payable 100,000.00 Unearned Revenue 28,822.00

  19. $71,178 x 0.12 End of First Year End of Second Year Interest Expense 8,541.36 Discount on Notes Payable 8,541.36 Unearned Revenue 5,764.40 Sales Revenue 5,764.40 Interest Expense 9,566.32 Discount on Notes Payable 9,566.32 Unearned Revenue 5,764.40 Sales Revenue 5,764.40 $28,822 ÷ 5 ($71,178 + $8,541.36) x 0.12 Notes Payable Exchanged for Cash and Rights or Privileges

  20. 1. Cash 75000 Dic on np 27336.15 note payable 75000 Unearned revenue 27336.15

  21. Interest expense 5719.66 (47663.85x12%) Dis on np 5719.66 Unearned revenue 5467.23 (27336.15/5) Sales revenue 5467.23

  22. Notes Payable Exchanged forProperty, Goods, or Services • The note is recorded at the fair value of the property, goods, or services, or the fair value of the note, which is more reliable • If neither of these fair values is determinable, the note is recorded at its present value by discounting the future cash flow using the incremental interest rate of the borrower

  23. Notes Payable Exchanged forProperty, Goods, or Services • January 1,2004 the Marsden Company purchases used equipment from the Joyce Company, issuing a non-interest-bearing $10,000,5year note in exchange. Neither the fair value of the equipment or that of note is determinable. If marsden’s incremental borrowing rate is 12%. Assume the remaining asset life is 10 years (no residual value). • Marsden records the issue of the note, the first two interest payments, and annual straight-line depreciation method. APB Opinion No. 21 states that the stipulated rate of interest should be presumed fair. This presumption can be overcome only if--

  24. Equipment 68301.30 • Dis on np 31689.70 • Np 100000

  25. 04.12.31 interest expense (68301.3x10%) 6830.13 Dis on np 6830.13

  26. C 13 hapter The End

  27. 2004 July 1 Cash 97,158.54 Discount on Bonds Payable 2,841.46 Bonds Payable 100,000.00

  28. Dec. 31 Interest Expense 5,343.72 Discount on Bonds Payable 343.72 Cash 5,000.00 • June 30 Interest Expense 5,362.62 Discount on Bonds Payable 362.62 Cash 5,000.00 2005 Dec. 31 Interest Expense 5,382.57 Discount on Bonds Payable 382.57 Cash 5,000.00

  29. E 13-5 • July 1 Cash 206,801.60 Premium on Bonds Payable 6,801.60 Bonds Payable 200,000.00

  30. Dec. 31 Interest Expense 12,408.10 Premium on Bonds Payable 591.90 Cash 13,000 • June 30 Interest Expense 12,372.58 Premium on Bonds Payable 627.42 Cash 13,000

  31. E13-6 1. (n = 10, i = 0.06) Present value of principal ($800,000 x 0.558395) = $446,716.00 Present value of interest ($ 44,000 x 7.360087) = 323,843.83 $770,559.83

  32. 2. n = 10, i = 0.05 Present value of principal ($800,000 x 0.613913) = $491,130.40 Present value of interest ($ 44,000 x 7.721735) = 339,756.34 $830,886.74

  33. E 13-7 2004 Jan. 1 Cash 102,458.71 Premium on Bonds Payable 2,458.71 Bonds Payable 100,000.00

  34. 2004 June 30 Interest Expense 6,147.52 Premium on Bonds Payable 352.48 Cash 6,500 Dec. 31 Interest Expense 6,126.37 Premium on Bonds Payable 373.63 Cash 6,500

  35. 2 • 2004 Jan. 1 Cash 97,616.71 Discount on Bonds Payable 2,383.29 Bonds Payable 100,000

  36. 2004 June 30 Interest Expense 6,833.17 Discount on Bonds Payable 333.17 Cash 6,500.00 Dec. 31 Interest Expense 6,856.49 Discount on Bonds Payable 356.49 Cash 6,500.00

  37. E13-11 1.$1,500,000 x 0.98 = $1,470,000 $1,500,000- 1,470,000=$30,000( discount) • discount amortization per month=250 30000/120 3. 2005 Mar. 31 Interest Expense 42,000 Discount on Bonds Payable 750 Interest Payable 41,250 ($1,500,000 x0.11 x 3/12)

  38. Total amortized discount 250 x 36 =9750 Unamortized discount 3000-9750= (20,250） BV= 1,470000+9750= (1,479,750) Call price ($1,500,000 x 1.07) $1,605,000 Loss on bond redemption $ 125,250 3.31 Bonds Payable 1,500,000 Loss on Bond Redemption 125,250 Interest Payable 41,250 Discount on Bonds Payable 20,250 Cash [($1,500,000 x 1.07) + $41,250] 1,646,250

  39. E 13-16 1. Value Assigned to Bonds = x $535,000 = $496,091 Value Assigned to Warrants = x $535,000 = $ 38,909 Value per Warrant = = $3.89

  40. 1.Cash 535,000 Discount on Bonds Payable 3,909 Bonds Payable 500,000 Common Stock Warrants 38,909 2. Cash ($20 x 4,000) 80,000 Common Stock Warrants 15,560 (4,000 x $3.89) Common Stock ($10 x 4,000) 40,000 Additional Paid-in Capital on Common Stock 55,560

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