Related questions with answers

Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of $3,000,000 on January 2, 2003, at a discount of$150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

Instructions

a. Prepare journal entries to record the issuance of the 11% bonds and the redemption of the 9% bonds.
b. Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.

Distinguish between the following values relative to bonds payable:


a. Maturity value.	c. Market (fair) value.
b. Face value.	d. Par value.

Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet.

The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account.

After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan's land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan.

Instructions

a. What are project financing arrangements using special-purpose entities?

b. What are take-or-pay contracts?

c. Should Ryan record the plant as an asset together with the related obligation?

d. If not, should Ryan record an asset relating to the future commitment?

e. What is meant by off-balance-sheet financing?

Question

A company proposes to include in its SEC registration statement a balance sheet showing its subordinate debt as a portion of stockholders’ equity. Will the SEC allow this? Why or why not?

Solution

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Subordinate debt should $\text{\underline{not be included}}$ in the stockholders' equity section of the balance sheet. Any captions representing the combination of stockholders' equity and only subordinated debts must be deleted.