N6.Account Jet Air Inc. contracted with Systems Plus Inc. to manufacture heavy equipment. The equipment was completed and ready for useOn January 1, 2020. Jet Air Inc. issued a $1,000,000 note to Systems Plus Inc. in exchange for the equipment that required 8%interest payments annually over 3 years on December 31 of each year. Although the fair value of the customized heavyequipment was not reasonably determinable, it was determined that 10% was a reasonable rate of interest for such atransaction.4.00%5.00%6.00%7.00%8.00%9.00%10.00%$1,000,000.O $1,051,540.Present value of single $1(Table 2)0.816300.793830.772180.75131The equipment is recorded on January 1,2020 at$949,248O $950,258.30.889000.863840.8396260.790310.746220.704960.666340.630170.596270.56447Present value of $1 ordinaryannuity (Table 4)32.775092.723252.673012.624322.577102.531292.4868565.242145.075694.917324.766544.622884.485924.35526 Mitchell Inc. issued 64, 10%, $1,000 bonds on January 1, 2020, for $70,006. The bonds pay cash interest semiannually eachJune 30, and December 31, and were issued to yield 8%. The bonds mature December 31, 2025, and the company uses theeffective interest method to amortize bond discounts or premiums. On January 1, 2020, Mitchell Inc. elects to account for thebonds using the fair value option. At December 31, 2021, the market rate on the bonds is 9%.Present value of a $1 singlepayment (Table 2)4.00%4.50%5.00%4 0.854800.83856 0.82270680.79031 0.767900.73069 0.70319 0.676840.6755612 0.62460 0.5896610The fair value of the bonds at 12/31/2021 is$66,111.O $70,006.$64,000.$68,309Present value of a $1 ordinaryannuity (Table 4)4.00%4.50%3.62990 3.587530.74622 5.24214 5.157876.73274 6.595897.912720.55684 9.38507 9.118580.64393 0.61391 8.110905.00%3.545955.075696.463217.721738.86325

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Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 16E

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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 Brewsters 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 Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters 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: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? 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: 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? 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: 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? 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?
On July 1, 2019, Aldrich Company purchased as an available-for-sale security 200,000 face value, 9% U.S. Treasury notes for 194,000. The notes mature July 1, 2020, and pay interest semiannually on January 1 and July 1. The notes were sold on December 1, 2019, for 199,000. Aldrich normally uses straight-line amortization on all of its notes. In its income statement for the year ended December 31, 2019, what amount should Aldrich report as a gain on the sale of the available-for-sale security? a. 2,500 b. 3,500 c. 5,000 d. 6,000

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