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    Tempe Company extinguished $10 million of bonds payable by calling them at par and issuing new $10 million bonds at 9%. This resulted in a $150,000 loss on extinguishment. Traylor Company sold $100,000 of receivables for $98,000 but guaranteed to buy back up to $15,000 of defaulted receivables. This did not qualify as a sale because Traylor retained credit risk. Garnier used a put option to hedge future receipt of 1 million lire. At maturity, the option was exercised at a $20,000 gain, fully offsetting the $20,000 loss from the currency change on the lire receipt. The

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    Quiz Ia Quiz Ia

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    Tempe Company extinguished $10 million of bonds payable by calling them at par and issuing new $10 million bonds at 9%. This resulted in a $150,000 loss on extinguishment. Traylor Company sold $100,000 of receivables for $98,000 but guaranteed to buy back up to $15,000 of defaulted receivables. This did not qualify as a sale because Traylor retained credit risk. Garnier used a put option to hedge future receipt of 1 million lire. At maturity, the option was exercised at a $20,000 gain, fully offsetting the $20,000 loss from the currency change on the lire receipt. The

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    QUIZ IA QUIZ IA

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    Tempe Company extinguished $10 million of bonds payable by calling them at par and issuing new $10 million bonds at 9%. This resulted in a $150,000 loss on extinguishment. Traylor Company sold $100,000 of receivables for $98,000 but guaranteed to buy back up to $15,000 of defaulted receivables. This did not qualify as a sale because Traylor retained credit risk. Garnier used a put option to hedge future receipt of 1 million lire. At maturity, the option was exercised at a $20,000 gain, fully offsetting the $20,000 loss from the currency change on the lire receipt. The

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    146 views2 pages

    Quiz Ia Quiz Ia

    Uploaded by

    Mili Dit
    Tempe Company extinguished $10 million of bonds payable by calling them at par and issuing new $10 million bonds at 9%. This resulted in a $150,000 loss on extinguishment. Traylor Company sold $100,000 of receivables for $98,000 but guaranteed to buy back up to $15,000 of defaulted receivables. This did not qualify as a sale because Traylor retained credit risk. Garnier used a put option to hedge future receipt of 1 million lire. At maturity, the option was exercised at a $20,000 gain, fully offsetting the $20,000 loss from the currency change on the lire receipt. The

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    of 2

    1.

    Tempe Company Long-term Debt (extinguishment)


    On January 1, Year 1, Tempe extinguishes $10 million of 10 perfect bonds payable due December 31,
    Year 2, that were originally issued at a discount by calling them at par value. The current carrying
    amount of the bonds payable is $9,950,000. To finance the debt extinguishment, management
    issues new debt at par with a new lender in the amount of $10 million. The new debt matures on
    Deember 31, Year 2, and has a 9 percent annual interest rate. Management incurs $100,000 in legal
    costs to negotiate the issuance of the new long-term bonds payable
    Required:
    Prepare the journal entries to record the extinguishment of the debt and interest expense for year 1
    ANSWER:
    The carrying value of the 10% bonds of $9,950,000 along with the issuance costs on the 9% bonds
    of $100,000 are both included in the calculation of the gain or loss on extinguishment of debt.
    Bonds payable 10%
    Loss on extinguishment of debt
    Cash
    Bonds payable 9%

    $9,950,000
    150,000
    $100,000
    10,000,000

    The new 9% bonds are issued at par. Thus, the effective interest rate is the same as the stated
    interest of 9%. Interest expense is $900,000 ($10,000,000 x 9%).
    Interest expense
    $900,000
    Cash
    $900,000
    2. Traylor Company Receivables (derecognition)
    On December 1, YEar 1, Traylor Company sells $100,000 of short-term trade receivables to Main
    Street Bank for $98,000 in cash by guaranteeing to buy back the first $15,000 of defaulted
    receivables. Traylors historic rate of noncollection on receivables is 5%. Traylor notifies the
    customers affected that they should make payment on their accounts directly to Main Street Bank
    Required:
    Determine whether the sale of receivables by Taylor Company qualifies for derecognition
    ANSWER
    By guaranteeing to buy back up to 15% of the receivables that cannot be collected, Traylor Company
    retains one of the significant risks associated with ownership of receivables credit risk. Therefore,
    the company has not met the general criterion for financial asset derecognition. Traylor will not be
    able to record this transaction as a sale, with
    derecognition of receivables. Instead, Traylor should record the transaction as a loan payable
    secured by accounts receivable.
    3. Garnier Corporation Option Cash Flow Hedge of Forecasted Transaction
    Given the experience, Garnier Corporation expects that it will sell goods to a foreign customer at a
    price of 1 million lire on March 15, Year 2. To hedge this forecasted transaction, a three-month put
    option to sell 1 million lire is acqired on December 15, Year 1. Garnier selects a strike price of $0.15
    per lire, paying a premium of $0.005 per unit, when the spot rate decreases to $0.14 at December
    31, Year 1, causing the fair value of the option to increase to $12,000. By Marcg 15, Year 2, when the
    goods are delivered and payment is received from the customer, the spot rate has fallen to $0.13,
    resulting in a fair value for the option of $20,000
    Required:
    Prepare all journal entries for the option hedge of a forecasted transaction and for the export sale,
    assuming that December 31 is Garnier Corporations year-end. What is the overall impact on net
    income over the two accounting periods? What is the net cash inflow from this export sale?
    ANSWER:
    Date
    12/15/Y1
    12/31/Y1
    3/15/Y2

    Fair Value
    $5,000
    $12,000
    $20,000

    Option
    Intrinsic Value
    Time ValueChange in Time Value
    -0$5,000
    -$10,000
    $2,000
    - $3,000
    $20,000
    -0- $2,000

    12/15/Y1 Foreign currency option


    Cash [1 million lire x $.002]

    $5,000
    $5,000

    No journal entry related to the forecasted transaction.


    12/31/Y1 Foreign currency option
    AOCI

    $7,000

    $7,000

    To recognize the increase in the value of the foreign currency option with a corresponding
    credit to AOCI.
    Option expense
    $3,000
    AOCI
    $3,000
    To recognize the change in the time value of the option as an expense with a corresponding
    credit to AOCI.
    3/15/Y2

    Foreign currency option


    $8,000
    AOCI
    $8,000
    To recognize the increase in the value of the foreign currency option with a corresponding
    credit to AOCI.
    Option expense
    $2,000
    AOCI
    $2,000
    To recognize the decrease in the time value of the option as an expense with a
    corresponding credit to AOCI.
    Foreign currency (lire)
    $130,000
    Sales revenue
    $130,000
    To record the sale and receipt of 1 million lire from the customer at the spot rate.
    Cash
    $150,000
    Foreign currency option
    20,000
    Foreign currency (lire)
    $130,000
    To record exercise of the foreign currency option at the strike price of $.15 and close out the
    foreign currency option account.
    AOCI
    $20,000
    Adjustment to Net Income
    $20,000
    To transfer the amount accumulated in AOCI as an adjustment to net income in the period in
    which the forecasted transaction occurs.

    Impact on net income:


    Year 1
    Option expense
    Year 2
    Option expense
    Sales revenue
    Adjustment to net income

    $ (3,000)
    (2,000)
    130,000
    20,000
    $145,000

    Net cash inflow from export sale: $145,000 = ($150,000 - $5,000)

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