![INTERMEDIATE ACCOUNTING(LL)-W/2 ACCESS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260180657/9781260180657_smallCoverImage.gif)
Convertible bonds; zero coupon; potentially convertible into cash; FASB codification research
• LO14–5
The 2018 annual report of MLS Corporation included the following disclosure note:
Note 10: Borrowings (in part)
Convertible Debt
On June 15, 2018, we issued $125 million of zero coupon convertible unsecured debt due on June 15, 2020 in a private placement offering, priced to yield 1.85%. Proceeds from the offering were $118.3115 million. Initially, each $1,000 principal amount of bonds was convertible into 30 shares of MLS common stock at a conversion price of $35 per share.
The bonds are convertible at any time. Upon conversion, we will pay cash up to the aggregate principal amount of the bonds and pay or deliver cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election.
Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for the liability and equity components of the bonds in a manner that reflects our nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. The net proceeds of $118.3 million were allocated between debt for $117.2 million and shareholders’ equity for $1.1 million with the portion in shareholders’ equity representing the fair value of the option to convert the debt.
Required:
1. Prepare the
2. What amount of interest expense, if any, did MLS record the first year the bonds were outstanding?
3. Normally under U.S. GAAP, we record the entire issue price of convertible debt as a liability. However, MLS separately recorded the liability and equity components of the notes. Why?
4. Obtain the relevant authoritative literature on classification of debt expected to be financed using the FASB’s Codification Research System. You might gain access from the FASB website (www.fasb.org), from your school library, or some other source. Determine the criteria for reporting debt potentially convertible into cash. What is the specific codification citation that MLS would rely on in applying that accounting treatment?
![Check Mark](/static/check-mark.png)
Want to see the full answer?
Check out a sample textbook solution![Blurred answer](/static/blurred-answer.jpg)
Chapter 14 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/2 ACCESS
- Problem 12-3 (Algo) Securities available-for-sale; bond investment; effective interest; financial statement effects [LO12-1, 12-4] Fuzzy Monkey Technologies, Incorporated purchased as a long-term investment $60 million of 6% bonds, dated January 1, on Janua 1, 2024. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $46 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2024, was $50 million. Required: 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4-6. At what amount will Fuzzy Monkey report its investment in the December 31, 2024, balance sheet? 4-b. Prepare the entry necessary to achieve this reporting objective. 5. How would Fuzzy Monkey's 2024 statement of cash flows be affected by…arrow_forwardExercise 14-14 (Algo) New debt issues; offerings announcements [LO14-2] When companies offer new debt security issues, they publicize the offerings in the financial press and on Internet sites. Assume the following were among the debt offerings reported in December 2024: New Securities Issues Corporate National Equipment Transfer Corporation—$212 million bonds via lead managers Second Tennessee Bank N.A. and Morgan, Dunavant & Company, according to a syndicate official. Terms: maturity, December 15, 2033; coupon 7.58%; issue price, par; yield, 7.58%; noncallable; debt ratings: Ba-1 (Moody's Investors Service, Incorporated), BBB+ (Standard & Poor's). IgWig Incorporated—$362 million of notes via lead manager Stanley Brothers, Incorporated, according to a syndicate official. Terms: maturity, December 1, 2035; coupon, 6.58%; Issue price, 99; yield, 6.68%; call date, NC; debt ratings: Baa-1 (Moody's Investors Service, Incorporated), A (Standard & Poor's).…arrow_forwardusiness: BUQU 1130: Business Mathematics Page 137 6. [HW] A $25,000, 10% bond redeemable at par on Dec 1, 2028, is purchased on September 25, 2017, to yield 7.6^ compounded semi-annually. Bond interest is payable semi-annually. a) What is the cash price of the bond? b) What is the accrued interest? c) What is the purchase price?arrow_forward
- Q#9 On June 30, 2021, Singleton Computers issued 5% stated rate bonds with a face amount of $280 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 4% (2.0% semiannual rate). Interest is paid semiannually (2.5%) on June 30 and December 31, beginning on December 31, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)Required:1. Determine the price of the bonds on June 30, 2021.2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method. 1. Table values are based on: n = i = Cash Flow Amount Present Value Interest Principal Price of bondsarrow_forwardExercise 10.9 (Algo) Accounting for Bonds Issued at a Premium: Issuance, Interest Payments, and Retirement (LO10-5, LO10-6) Xonic Corporation issued $8.5 million of 20-year, 8 percent bonds on April 1, 2021, at 102. Interest is paid on March 31 and September 30 of each year, and all of the bonds in the issue mature on March 31, 2041 Xonic's fiscal year ends on December 31. Prepare the following journal entries. a. April 1, 2021, to record the issuance of the bonds. b. September 30, 2021, to pay interest and to amortize the bond premium. c. March 31, 2041, to pay interest, amortize the bond premium, and retire the bonds at maturity (make two separate entries). Assume an adjusting entry was made on December 31, 2040, to recognize interest from October 1 to December 31. d. What is the effect of amortizing the bond premium on (1) annual net income and (2) annual net cash flow from operating activities. (ignore possible income tax effects.) (If no entry is required for a transaction/event,…arrow_forwardProblem 5-9 (AFCPA Adapted) Blue Company reported the following financial liabilities on December 31, 2020: 9% debentures, callable in 2021, due in 2022 11% collateral trust bonds, convertible into share capital beginning in 2021, due in 2022 10% debentures, P300,000 maturing annually 3,500,000 3,000,000 1,500,000 What is the total amount of term bonds? 3,000,000 b. a. 3,500,000 5,000,000 d. с. 6,500,000arrow_forward
- Exercise 5-21 (Algo) Price of a bond [LO5-9, 5-10] On September 30, 2024, the Techno Corporation issued 8% stated rate bonds with a face amount of $360 million. The bonds mature on September 30, 2044 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30. Required: Determine the price of the bonds on September 30, 2024. Note: Use tables, Excel, or a financial calculator. Round your final answers to nearest whole dollar amount, not in millions. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Time values are based on: n = i= Cash Flow Interest Principal Price of bonds $ Amount 40 5% 9,600,000 $ Present Value 31,195,340arrow_forwardBrief Exercise 12-2 (Algo) Trading securities; financial statement effects [LO12-3] S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. Assume that on December 27, 2024, S&L purchased Coca-Cola bonds at par for $920,000 and sold the bonds on January 3, 2025, for $922,000. At December 31, the bonds had a fair value of $916,500. What pretax amounts did S&L include in its 2024 and 2025 net income as a result of this investment (ignoring interest)? Note: Enter all amounts as positive values. 2024 2025 Pretax Amountarrow_forwardQUESTION 1 Bad Bookkeepers Inc. originally planned to issue $100,000 of 11% par bonds on January 1, 2027 with interest payable on June 30 and December 31. Due to some delays in the regulatory approval process the bonds are not issued (sold) until March 1, 2027. What was the total amount of cash that Big Bad Bookkeepers Inc. received from the sale of the bonds? Please do not use commas, $ or +/- in your answer.arrow_forward
- 25 The balance sheet of Indian River Electronics Corporation as of December 31, 2020, included 12.25% bonds having a face amount of $90 million. The bonds had been issued in 2013 and had a remaining discount of $3 million at December 31, 2020. On January 1, 2021, Indian River Electronics called the bonds before their scheduled maturity at the call price of 102 Required: Prepare the journal entry by Indian River Electronics to record the redemption of the bonds at January 1, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) View transaction list Journal entry worksheet Record the redemption of the bonds. Note: Enter debits before credits Date January 01, 2021 Record entry General Journal Clear entry Debit Credit View general journalarrow_forwardPB5. LO 13.3 Dixon 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 annually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. June 30, 2019: entry to record payment of interest to bondholders C. June 30, 2019: entry to record amortization of discount D. June 30, 2020: entry to record payment of interest to bondholders E. June 30, 2020: entry to record amortization of discountarrow_forwardProblem 12-1 (Static) Securities held-to-maturity; bond investment; effective interest; financial statement effects [LO12-1, 12-2] Fuzzy Monkey Technologies, Incorporated purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2024. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2024, was $70 million. Required: 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4. At what amount will Fuzzy Monkey report its investment in the December 31, 2024 balance sheet? 5. How would Fuzzy Monkey's 2024 statement of cash flows be affected by this investment? (If more than one approach is possible, indicate the one that…arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
![Text book image](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780134475585/9780134475585_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781259722660/9781259722660_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781259726705/9781259726705_smallCoverImage.gif)