QUESTIONS
1. (a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture?
What does it contain? (c) What is a mortgage?
2. Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures.
Differentiate between term bonds, mortgage bonds, debenture bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible bonds, commodity-backed bonds, and deep discount bonds.
3. Distinguish between the following interest rates for bonds payable:
(a) Yield rate. (d) Market rate.
(b) Nominal rate. (e) Effective rate.
(c) Stated rate.
4. Distinguish between the following values relative to bonds payable:
(a) Maturity value. (c) Market (fair) value.
(b) Face value. (d) Par value.
5. Under what conditions of bond issuance does a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?
6. How should discount on bonds payable be reported on the financial statements? Premium on bonds payable?
7. What are the two methods of amortizing discount and premium on bonds payable? Explain each.
8. Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.
9. Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?
10. Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
11. What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?
12. Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.
13. How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?
14. What is done to record properly a transaction involving the issuance of a non-interest-bearing long-term note in exchange for property?
15. How is the present value of a non-interest-bearing note computed?
16. When is the stated interest rate of a debt instrument presumed to be fair?
17. What are the considerations in imputing an appropriate interest rate?
18. Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
19. What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
20. Pierre Company has a 12% note payable with a carrying value of $20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is $22,600. Prepare the entry to record the fair value option for this note, assuming (a) no change in credit risk, and (b) the change is due to a change in credit risk.
21. What disclosures are required relative to long-term debt and sinking fund requirements?
22. What is off-balance-sheet financing? Why might a company be interested in using off-balance-sheet financing?
23. What are some forms of off-balance-sheet financing?
24. Explain how a non-consolidated subsidiary can be a form of off-balance-sheet financing.
*25. What are the types of situations that result in troubled debt?
*26. What are the general rules for measuring gain or loss by both creditor and debtor in a troubled-debt restructuring involving a settlement?
*27. (a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?
*28. What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?
*29. What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubleddebt restructuring involving a modification of terms? In what ways is the accounting for troubled-debt restructurings non-symmetrical?
*30. Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?
