Question

Objective: To enhance the student’s knowledge of the FASB Codification and to practice communicating the results of the research in “clear, complete and professional” manner.

Background: Company Z is growing rapidly and needs about $40 million of additional capital to finance the expansion of its production capacity. During 2017, the Board of Directors and management agree to the issuance of $40,000,000 of 20 year bonds with stated interest of 4 %, paid semi-annually. The bonds were issued at an effective interest rate of 5% with a covenant requiring the maintenance of a debt to asset ratio of 60%.

Instructions: Answer the following questions. For each answer provide the appropriate references to the FASB Codification. Do NOT copy and paste the codification sections.

1. Explain what is an effective interest rate and how is it used in accounting for long-term debt.

2. Could the company use straight-line amortization of the discount and, if so, under what circumstances?

3. Describe how the company would classify their bond on the balance sheet and what disclosures would be necessary.

The question can be answered partially as i will fill move forward with including the FASB part unless there is a way to give access.

Answer 1

1 computation of effective interest rate.

company needs additional capital of $ 40 million for expansion of production capacity.

due to such requirement BOD and management agree to issue $ 40,00,000. 20 years old bond.

bond are issued with stated interest of 4% semi annually.

so effective interest rate for the year is @8% i.e (4*2)

accounting treatment for such interest is

the same is charged to profit and loss account for the year 2017.

2 can company use straight line method for amortization of discout

answer is definately yes the company can use straight line method for amortization of discount but

it will depends on policy of company .

in what circumstsncesa compny can use such method

answer to this question is only when company issued the bond at discount.

but un this question company npt issued the bopnd on discount.

Note- but there is also other method of amortization of discount.

3.log term bond appered in liability side under head secured liability.