Question

Mountaineer Corp. issued $ 1,000,000, 8 percent convertible bonds on January 1, 2019 to yield 10 percent. The fifteen year bonds pay interest semiannually on June 30 and December 31 and interest is amortized using the effective interest method. Also, the bonds are callable at 104 any time after the second payment. Mountaineer prepares audited financial statements every December 31. Answer all the below questions. Justify your answers by showing ALL calculations.

Ignoring taxes, how much and in what direction is income for fiscal 2019 affected by this use of debt

Prepare the long-term debt section of the December 31, 2019 balance sheet (show how ALL the accounts would appear).

Answer 1

Journal Entries

Cash a/c...............................dr 1,000,000

To 8% bonds payable 1,000,000

(Being bonds issued recorded)

Bond Interest expense a/c.................................dr 80,000

To Interest payable a/c 80,000

At the end of the financial year 2019, the income of the company will be reduced by $80,000. The expense will be recorded in the statement of income. The profit of the company will reduc by $80,000

Long-Term Debt Section in Balance Sheet as on December 31, 2019

Liability

Long-Term Liability

Bonds Payable $1,000,000

Current Liability

Interest payable $80,000