INTERMEDIATE ACCT VOL.2>CUSTOM<
9th Edition
ISBN: 9781307165067
Author: SPICELAND
Publisher: MCG/CREATE
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Textbook Question
Chapter 13, Problem 13.12P
Various liabilities; balance sheet classification; prepare liability section of balance sheet; write notes
• LO13–4, LO13–5
Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2018. Transit’s fiscal year ends on December 31. Its annual financial statements are issued in April.
- 1. Transit has outstanding 6.5% bonds with a face amount of $90 million. The bonds mature on July 31, 2027. Bondholders have the option of calling (demanding payment on) the bonds on July 31, 2019, at a redemption price of $90 million. Market conditions are such that the call option is not expected to be exercised.
- 2. A $30 million 8% bank loan is payable on October 31, 2024. The bank has the right to demand payment after any fiscal year-end in which Transit’s ratio of current assets to current liabilities falls below a contractual minimum of 1.9 to 1 and remains so for six months. That ratio was 1.75 on December 31, 2018, due primarily to an intentional temporary decline in parts inventories. Normal inventory levels will be reestablished during the sixth week of 2019.
- 3. Transit management intended to refinance $45 million of 7% notes that mature in May 2019. In late February 2019, prior to the issuance of the 2018 financial statements, Transit negotiated a line of credit with a commercial bank for up to $40 million any time during 2019. Any borrowings will mature two years from the date of borrowing.
- 4. Transit is involved in a lawsuit resulting from a dispute with a food caterer. On February 13, 2019, judgment was rendered against Transit in the amount of $53 million plus interest, a total of $54 million. Transit plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
Required:
- 1. How should the 6.5% bonds be classified by Transit among liabilities in its balance sheet? Explain.
- 2. How should the 8% bank loan be classified by Transit among liabilities in its balance sheet? Explain.
- 3. How should the 7% notes be classified by Transit among liabilities in its balance sheet? Explain.
- 4. How should the lawsuit be reported by Transit? Explain.
- 5. Prepare the liability section of a classified balance sheet for Transit Airlines at December 31, 2018. Transit’s accounts payable and accruals were $43 million.
- 6. Draft appropriate note disclosures for Transit’s financial statements at December 31, 2018, for each of the five items described.
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P 16
On 1/10/2019 ABC company issued a $120,000, 12%, 4 years bonds. The bonds pay interest quarterly on 1/1 , 1/4,1/7 , and 1/10. The bonds were issued for 136,293.25, since the market rate was equal 8%. On 1/5 / 2021 the company called 75% of its outstanding at 102²
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(b) What is the bond's carrying value that must be presented on the statement of financial position as on December, 31, 2020?
(c) Prepare ALL the required journal entries for the year 2021.
PB6.
LO 13.3Edward Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable semiannually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions.
July 1, 2018: entry to record issuing the bonds
Dec. 31, 2018: entry to record payment of interest to bondholders
Dec. 31, 2018: entry to record amortization of discount
EA6. LO 13.2 Oak Branch Inc. issued $700,000 of 5%, 10-year bonds when the market rate was 4%. They received $757,243. Interest was paid semi-annually. Prepare an amortization table for the first three years of the bonds.
Cash Interest Payment
Rate 0.025
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Rate 0.02
Amortization of Premium
Carrying Value
Jan. 1, Year 1
757,243
June 30, Year 1
Dec. 31, Year 1
June 30, Year 2
Dec. 31, Year 2
June 30, Year 3
Dec. 31, Year 3
Chapter 13 Solutions
INTERMEDIATE ACCT VOL.2>CUSTOM<
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