Posted: September 13th, 2017

bondholders

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Question 10
On July 1, 2012, MTR Ltd. issued a series of $4,800,000 face-value convertible bonds due in five years. Each
$1,500 bond allowed the holder to convert the bond to 160 common shares. On the day the bonds were issued,
MTR calculated that the conversion rights were valued at $230,703.
On July 1, 2015, the bonds had a carrying value on MTR’s books of $4,712,185, and the fair market value of the
bonds without the convertible option was $4,727,000.
Assume all the bondholders voluntarily decided to convert their bonds to common shares on July 1, 2015.
Prepare the journal entry to record the conversion.
(Credit account titles are automatically indented when
the amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the
account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
Assume that MTR paid the bondholders an incentive of $34,400 to convert their bonds to common shares, and
that all the bondholders agreed to convert their bonds to common shares on July 1, 2015. Prepare the journal
entry to record the conversion.
(Credit account titles are automatically indented when the amount is
entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and
enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
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Question 10
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Question 11
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Question 11
ASN Corporation is in the process of preparing its financial statements for the current fiscal year end.
For each of the following independent situations, indicate (yes or no) whether ASN should recognize a
contingency for the situation. Next, assume that ASN follows proposed IFRS for the same situations, and
indicate (yes or no) whether ASN should recognize a liability for each situation.
Independent Situation
ASPE
IFRS
a)
ASN Corporation operates an oil refinery in Oklahoma,
an area prone to strong tornados. The current net book
value shown on ASN’s books for the refinery and the
associated land is $6,500,000.
b)
ASN Corporation uses DAW Installations to install some
of its products. On one project, DAW did a poor job and
damaged the customer’s facility. ASN has filed a lawsuit
against DAW for damages in the amount of $40,000.
DAW is contesting the suit and the case has yet to come
before a judge.
c)
One of ASN’s customers has telephoned to complain
about one of ASN’s products. The customer is angry
about some alleged manufacturing defects, and has
threatened to sue ASN for $100,000. So far, no lawsuit
has actually been filed.
d)
During the year, another company (LTN, Inc.) asked ASN
to act as a guarantor so that LTN could obtain a
$5,000,000, 5-year loan from the bank. If LTN defaults
on the loan in any way, ASN would be required to repay
the bank on LTN’s behalf. To date, LTN has made all
required payments on the loan.
e)
CTZ Ltd., a competitor of ASN’s, has filed a lawsuit
against ASN for $500,000. ASN’s attorneys have
reviewed the lawsuit and believe that, although CTZ has
a valid case, the suit can be settled out of court for
$350,000.
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Question 5
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Question 5
Groundhog, Inc. has $1,121,000, $0.95, no par value preferred shares (59,000 shares) and $1,700,000 of no
par value common shares outstanding (91,000 shares). No dividends were paid or declared during 2012 and
2013. The company wants to distribute $535,250 in dividends on December 31, 2014.
Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common),
assuming the preferred shares are non-cumulative and non-participating.
Preferred
Common
Total dividends $
$
Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common),
assuming the preferred shares are cumulative and non-participating.
Preferred
Common
Total dividends $
$
Calculate the amount of dividends to be paid to each group of shareholders (i.e. preferred and common),
assuming the preferred shares are cumulative and fully participating.
Preferred
Common
Total dividends $
$
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Question 6
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Question 6
TLK Industries Limited purchased a strip mine for cash on April 1, 2014 at a cost of $6,100,000. TLK expects to
operate the mine for 10 years, at which it is legally required to restore the surrounding area to its original state.
It is estimated that it will cost $526,000 to do this at the end of the mine’s useful life. The company’s year-end
is December 31, and TLK follows ASPE.
Prepare the journal entry to record the purchase of the mine and to record the asset retirement obligation for
the mine on April 1, 2014. Based on the effective interest rate of 6%, the present value of the asset retirement
obligation (i.e., its fair value) on the date of acquisition is $293,716.
(Round answer to 0 decimal places,
e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not
indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the
amounts.)
Date
Account Titles and Explanation
Debit
Credit
Apr. 1, 2014
Prepare any journal entries required for the mine (straightline depreciation) and the asset retirement obligation
at December 31, 2014. The estimated residual value of the mine is zero.
(Round answer to 0 decimal
places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do
not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for
the amounts.)
Date
Account Titles and Explanation
Debit
Credit
Dec. 31,
2014
(To record depreciation for the mine.)
Dec. 31,
2014
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Question 6
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(To record accretion for the asset retirement
obligation.)
On April 1, 2024, TLK paid cash to an environmental firm to restore the mine’s surrounding area to its original
state at a cost of $545,000. Prepare the journal entry for the settlement of the asset retirement.
(Round
answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the
amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account
titles and enter 0 for the amounts.)
Date
Account Titles and Explanation
Debit
Credit
Apr. 1, 2024
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Question 8
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Question 8
MJR Corporation issued 1,000, ten year, 8% bonds for 103 on January 1, 2014. Each $1,500 bond carried a
detachable warrant allowing the holder to purchase 290 common shares in MJR at $6 per share, the price at
which MJR shares were trading on the day of the sale of the bonds. Similar straight bonds trading on the open
market paid 10%. On June 30, 2014, 100 of the bond holders exercised the options to buy the shares. Prepare
the journal entries to record these events.
(Credit account titles are automatically indented when the
amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account
titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

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