A. 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 2021:
New Securities Issues
Corporate
National Equipment Transfer Corporation—$208 million bonds via lead managers Second Tennessee Bank N.A. and Morgan, Dunavant & Co., according to a syndicate official. Terms: maturity, Dec. 15, 2030; coupon 7.54%; issue price, par; yield, 7.54%; noncallable; debt ratings: Ba-1 (Moody’s Investors Service, Inc.), BBB+ (Standard & Poor’s).
IgWig Inc.—$358 million of notes via lead manager Stanley Brothers, Inc., according to a syndicate official. Terms: maturity, Dec. 1, 2032; coupon, 6.54%; Issue price, 99; yield, 6.64%; call date, NC; debt ratings: Baa-1 (Moody’s Investors Service, Inc.), A (Standard & Poor’s).
Required:
1. Prepare the appropriate journal entries to record the sale of both issues to underwriters. Ignore share issue costs and assume no accrued interest.
2. Prepare the appropriate journal entries to record the first semiannual interest payment for both issues.
B.On January 1, 2021, Madison Products issued $80 million of 10%, 20-year convertible bonds at a net price of $80.3 million. Madison recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison’s no par common stock. Madison records interest by the straight-line method.
On June 1, 2023, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2023. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted.
In this question, combine the discount on the bonds with the face amount, and record the net amount as bonds payable. This is the “net method.” When the net method is used, the discount (or premium) is amortized directly to the bonds payable account.
Required:
Assume that Madison Products prepares its financial statements according to International Financial Reporting Standards using the net method.
1. & 2. Prepare the journal entries for the issuance of the bonds by Madison and interest payment for the June 30, 2021.
3. Prepare the journal entries for the June 30, 2023, interest payment by Madison and the conversion of the bonds (book value method).
C. American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2021. In payment for the $6.0 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 12%. (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. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2021.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2021.
4. Prepare the journal entry for the third installment payment on December 31, 2023.
