3rd Edition

ISBN: 9781337909358

Author: WAHLEN

Publisher: CENGAGE L

See similar textbooks

Videos

Textbook Question

Chapter 14, Problem 8C

On January 1, 2019, Brewster Company issued 2,000 of its 5-year, $1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for $1,980,000.

On July 1, 2022, Brewster issued 5,000 of its 6-year, $1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewster’s common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewster’s convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewster’s common stock, which had a market value of $105 per share at the date of the conversion.

Required:

1. Using the information about Brewster, answer the following questions:
1. a. Were the 11% bonds issued at par, at a discount, or at a premium? Why?
2. b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why?
2. Using the information about Brewster, explain the following:
1. a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why?
2. b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement?
3. Based on the information provided about Brewster, answer the following questions:
1. a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method?
2. b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Chapter 14, Problem 7C

Chapter 14, Problem 9C

Students have asked these similar questions

On January 1, 2019, Hyde Corporation purchased bonds with a face value of $300,000 for $308,373.53. The bonds the due June 30, 2022, carry a 13% stated interest rate,and were purchased to yield 12%. Interest is payable semiannually on June 30 and December 31. On March 31, 2020 in contemplation of a major aqusition, the company sold one-half the bonds for $159,500 including accrued interest; the remainder were held until maturity.Prepare the journal entries to record the purchase of the bonds, each interest payment the partial sale of the investment on March 31, 2020, and the retirement of the bond issue on June 30, 2022.

On January 1, 2020, Sage Company purchased $270,000, 6% bonds of Aguirre Co. for $248,099. The bonds were purchased to yield 8% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2025. Sage Company uses the effective-interest method to amortize discount or premium. On January 1, 2022, Sage Company sold the bonds for $249,638 after receiving interest to meet its liquidity needs. (a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit Jan. 1, 2020

On January 1, 2025, Oriole Company purchased $230,000, 6% bonds of Winds Co. for $240,065. The bonds were purchased to yield 5% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2030. Oriole Company uses the effective-interest method to amortize discount or premium. On January 1, 2027, Oriole Company sold the bonds for $234,565 after receiving interest to meet its liquidity needs. (a) Your answer has been saved. See score details after the due date. Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (Credit account titles are automatically Indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter O for the amounts. List debit entry before credit entry)

Chapter 14 Solutions

INTERM.ACCT.:REPORTING...-CENGAGENOWV2

Ch. 14 - Prob. 1GI Ch. 14 - Why does issuing debt result in an income tax...Ch. 14 - At the beginning of 2018, corporate tax rates...Ch. 14 - What is a bond? Define face value, maturity date,...Ch. 14 - What is the difference between a mortgage bond and...Ch. 14 - Prob. 6GI Ch. 14 - Prob. 7GI Ch. 14 - Prob. 8GI Ch. 14 - Prob. 9GI Ch. 14 - Prob. 10GI

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Solution Summary: The author explains that 11% bonds are issued at par, at a discount, or at premium. The interest expense for the 11 % bonds is higher in the first or second year of the bond issuance.

Videos

Chapter 14 Solutions