ACCT 2062 Homework #2

E14-1

(a) (b)

e (Classification of Liabilities) Presented below are various account balances of K.D. L lng Inc.Un

EXERCISE 14-1 (1520 minutes)(a) Valuation account relating to the long-term liability, bonds payable (sometimes referred to as

an adjunct account). The $3,000 would continue to be reported as long-term.

(b) Current liability if current assets are used to satisfy the debt.

(c) Current liability, $200,000; long-term liability, $800,000.

(d) Current liability.

(e) Probably noncurrent, although if operating cycle is greater than one year and current assets are used, this item would be classified as current.

(f) Current liability.(g) Current liability unless (a) a fund for liquidation has been accumulated which is not classified as a current asset or (b) arrangements have been made for refinancing.(h) Current liability.

(i) Current liability.

E14-1

(a) (b)

e (Classification of Liabilities) Presented below are various account balances of K.D. L lng Inc. Un

EXERCISE 14-3 (1520 minutes)1. Simon Company:

(a) 1/1/07 Cash ............................................................. 200,000 Bonds Payable ............................... 200,000(b) 7/1/07 Bond Interest Expense ........................... 4,500 ($200,000 X 9% X 3/12) Cash ................................................... 4,500(c) 12/31/07 Bond Interest Expense ........................... 4,500 Interest Payable ............................. 4,5002. GarFunkle Company:(a) 6/1/07 Cash ............................................................. 105,000 Bonds Payable ............................... 100,000 Bond Interest Expense ................ 5,000 ($100,000 X 12% X 5/12)(b) 7/1/07 Bond Interest Expense ........................... 6,000 Cash ................................................... 6,000 ($100,000 X 12% X 6/12)

(c) 12/31/07 Bond Interest Expense ........................... 6,000 Interest Payable .............................. 6,000

Note to instructor: Some students may credit Interest Payable on6/1/07. If they do so, the entry on 7/1/07 will have a debit to InterestPayable for $5,000 and a debit to Bond Interest Expense for $1,000.

E14-1

(a) (b)

e (Classification of Liabilities) Presented below are various account balances of K.D. L lng Inc. Un

EXERCISE 14-4 (1520 minutes)

(a) 1/1/08 Cash ($600,000 X 102%) ................................. 612,000 Bonds Payable ........................................ 600,000 Premium on Bonds Payable ....................................12,000

(b) 7/1/08 Bond Interest Expense ................................... 29,700 Premium on Bonds Payable ......................... 300 ($12,000 40) Cash ........................................................... 30,000 ($600,000 X 10% X 6/12)(c) 12/31/08 Bond Interest Expense ................................... 29,700 Premium on Bonds Payable......................... 300 Interest Payable ...................................... 30,000

E14-5 (Entries for Bond Transactions-Effective Interest) Assume the same information as in E144, except that Celine Dion Company uses the effective interest method of


(a) 1/1/08 Cash ($600,000 X 102%) ................................. 612,000 Bonds Payable ........................................ 600,000 Premium on Bonds Payable ............... 12,000(b) 7/1/08 Bond Interest Expense .................................... 29,898 ($612,000 X 9.7705% X 1/2) Premium on Bonds Payable .......................... 102 Cash ............................................................ 30,000 ($600,000 X 10% X 6/12)(c) 12/31/08 Bond Interest Expense ................................. 29,893 ($611,898 X 9.7705% X 1/2) Premium on Bonds Payable ....................... 107 Interest Payable ................................... 30,000

Carrying amount of bonds at July 1, 2008: Carrying amount of bonds at January 1, 2008 $612,000 Amortization of bond premium ($300,000 $29,898) (102) Carrying amount of bonds at July 1, 2008 $611,898


The effective-interest or yield rate is 12%. It is determined through trial anerror using Table 6-2 for the discounted value of the principal ($1,134,860) and Table 6-4 for the discounted value of the interest ($720,956); $1,134,860plus $720,956 equals the proceeds of $1,855,816. (A financial calculator may be used to determine the rate of 12%.)

Schedule of Discount Amortization Effective-Interest Method (12%)

Year Cash Interest Discount Carrying Paid Expense Amortized Amount of Bonds(1) (2) (3) (4)Jan. 1, 2007 $1,855,816.00Dec. 31, 2007 $200,000 $222,697.92* $22,697.92 1,878,513.92Dec. 31, 2008 200,000 225,421.67 25,421.67 1,903,935.59Dec. 31, 2009 200,000 228,472.27 28,472.27 1,932,407.86Dec. 31, 2010 200,000 231,888.94 31,888.94 1,964,296.80Dec. 31, 2011 200,000 235,703.20** 35,703.20 2,000,000.00

*$222,697.92 = $1,855,816 X .12.**Rounded.


(a) January 1, 2007 Cash ...................................................................... 537,907.37 Premium on Bonds Payable .............. 37,907.37 Bonds Payable ....................................... 500,000.00

(b) Schedule of Interest Expense and Bond Premium Amortization Effective-Interest Method 12% Bonds Sold to Yield 10%

Date Cash Interest Premium Carrying Paid Expense Amortized Amount of Bonds1/1/07 $537,907.3712/31/07 $60,000.00 $53,790.74 $6,209.26 531,698.1112/31/08 60,000.00 53,169.81 6,830.19 524,867.9212/31/09 60,000.00 52,486.79 7,513.21 517,354.71

(c) December 31, 2007 Bond Interest Expense ................................... 53,790.74 Premium on Bonds Payable ......................... 6,209.26 Cash ........................................................... 60,000.00

(d) December 31, 2009 Bond Interest Expense ................................... 52,486.79 Premium on Bonds Payable ......................... 7,513.21 Cash ........................................................... 60,000.00

E14-12 (Entry for Retirement of Bond; Bond Issue Costs) On January 2, 2002, Banno Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2011. Legal and other costs of $24,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on n strnight-line basis over the 10 yenrs. (Stra ight-line is not materially different in effect from the preferable "interest method".)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2007, Banno called $900,000 face amow1t of the bonds and retired them.

Instructions Jgnoring income taxes, compute the amount of loss, if any, to be rccogniled by Banno as a result of retiring the $900,000 of bonds in 2007 and prepare the journal entry to record the retirement.

(AICPA adapted)

E14-13 (Entries for Retirement and Issuance of Bonds) Matt Perry, Inc. had outstanding $6,000,000 of 11 'Yo bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of 1()%, 15-yeRr bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the l'I % bonds at 102 on August I. Unamortized bond discount and issue cost applicabl e to the 11 % bonds were $120,000 and $30,000, respectively.

Instructions Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.

El4-19 (Long-Term Debt Disclosure) At December 31, 2006, Helen Reddy Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2009. The second is a $6,000,000 bond issue which matures September 30, 2010. The third is a Sl 7,500,000 sinking fund debenture with annual sinking fund payments of $3,500,000 in each of the years 2008 through 2012.Instructions Prepare the note disclosure required by FASB Statement No. 47, "Disclosure of Long-term Obligations," for the long-term debt at December 31, 2006.


Reacquisition price ($900,000 X 101%) $909,000Less: Net carrying amount of bonds redeemed:Par value $900,000Unamortized discount (13,500)Unamortized bond issue costs (7,200) 879,300Loss on redemption $ 29,700Calculation of unamortized discountOriginal amount of discount: $900,000 X 3% = $27,000$27,000/10 = $2,700 amortization per yearAmount of discount unamortized: $2,700 X 5 = $13,500Calculation of unamortized issue costsOriginal amount of costs: $24,000 X $900,000/$1,500,000 = $14,400$14,400/10 = $1,440 amortization per yearAmount of costs unamortized: $1,440 X 5 = $7,200 January 2, 2007Bonds Payable ................................................................ 900,000Loss on Redemption of Bonds ................................. 29,700 Unamortized Bond Issue Costs ...................... 7,200 Discount on Bonds Payable ........................... 13,500 Cash ......................................................................... 909,000




(AICPA adapted)



El4-19 (Long-Term Debt Disclosure) At December 31, 2006, Helen Reddy Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2009. The second is a $6,000,000 bond issue which matures September 30, 2010. The third is a Sl 7,500,000 sinking fund debenture with annual sinking fund payments of $3,500,000 in each of the years 2008 through 2012. Instructions Prepare the note disclosure required by FASB Statement No. 47, "Disclosure of Long-term Obligations," for the long-term debt at December 31, 2006.

EXERCISE 14-13 (1520 minutes)Cash ................................................................................... 8,820,000Discount on Bonds Payable (.02 X $9,000,000) ... 180,000 Bonds Payable ..................................................... 9,000,000 (To record issuance of 10% bonds)

Bonds Payable ................................................................ 6,000,000Loss on Redemption of Bonds .................................. 270,000 Cash ($6,000,000 X 1.02).................................... 6,120,000 Discount on Bonds Payable ............................. 120,000 Unamortized Bond Issue Costs ...................... 30,000 (To record retirement of 11% bonds)

Reacquisition price ........................................................ $6,120,000Less: Net carrying amount of bonds redeemed: Par value .................................................................$6,000,000 Unamortized bond discount ............................. (120,000) Unamortized bond issue costs ....................... (30,000) 5,850,000Loss on redemption ....................................................... $ 270,000




(AICPA adapted)



El4-19 (Long-Term Debt Disclosure) At December 31, 2006, Helen Reddy Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2009. The second is a $6,000,000 bond issue which matures September 30, 2010. The third is a Sl 7,500,000 sinking fund debenture with annual sinking fund payments of $3,500,000 in each of the years 2008 through 2012.Instructions Prepare the note disclosure required by FASB Statement No. 47, "Disclosure of Long-term Obligations," for the long-term debt at December 31, 2006.

EXERCISE 14-19 (1015 minutes)At December 31, 2006, disclosures would be as follows:Maturities and sinking fund requirements on long-term debt are as follows:2007 $ 02008 3,500,0002009 5,500,000 ($2,000,000 + $3,500,000)2010 9,500,000 ($6,000,000 + $3,500,000)2011 3,500,000

E14-16 (Entries for Zero-Interest-Bearing Notes) On January 1, 2008, Ellen Greene Company makes the two following acquisitions.

1. Purchases land having a fair market value of $200,000 by issuing a 5-year, zero-interest-bearin gpromissory note i n the face amount of $337,012.

2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000(interest payable annually).

The company has to pay 11 % interest for funds from its bank.

Instructions (a) Record the two journal entries that should be recorded by Ellen Greene Company for the two

purchases on January 1, 2008. (b) Record the interest at the end of the first year on both notes using the effective interest method.

E14-17 (Imputation of Interest) Presented below are two independent situations:

(a) On January 1, 2008, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2011, was given in exchange. There was no established exchange price for the land, nor a ready market value for the note. TI1e interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2008, and the interest expense to be reported in 2008 related to this transaction.

(b) On January 1, 2008, Sally Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Sally Field Furniture agreed to sell furniture to this customer at lower than market price. A JO% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2008.

EXERCISE 14-16 (1520 minutes)(a) 1. January 1, 2008 Land .................................................................. 200,000.00 Discount on Notes Payable ....................... 137,012.00 Notes Payable ...................................... 337,012.00

(The $200,000 capitalized land cost represents the present value of the note discounted for five years at 11%.)

2. Equipment ....................................................... 185,674.30 Discount on Notes Payable ....................... 64,325.70* Notes Payable ...................................... 250,000.00

*Computation of the discount on notes payable:Maturity value $250,000.00Present value of $250,000 due in 8 years at 11%$250,000 X .43393 $108,482.50Present value of $15,000 payable annually for 8 years at 11% annually$15,000 X 5.14612 77,191.80Present value of the note (185,674.30)Discount $ 64,325.70

(b) 1. Interest Expense ......................................... 22,000.00 Discount on Notes Payable .......... 22,000.00 ($200,000 X .11)2. Interest Expense ......................................... 20,424.17 ($185,674.30 X .11) Discount on Notes Payable .......... 5,424.17 Cash ($250,000 X .06)...................... 15,000.00

E14-16 (Entries for Zero-Interest-Bearing Notes) On January 1, 2008, Ellen Greene Company makes the two following acquisitions.

1. Purchases land having a fair market value of $200,000 by issuing a 5-year, zero-interest-bearin g promissory note i n the face amount of $337,012.

2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

The company has to pay 11 % interest for funds from its bank.

Instructions (a) Record the two journal entries that should be recorded by Ellen Greene Company for the two

purchases on January 1, 2008. (b) Record the interest at the end of the first year on both notes using the effective interest method.

E14-17 (Imputation of Interest) Presented below are two independent situations:

(a) On January 1, 2008, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2011, was given in exchange. There was no established exchange price for the land, nor a ready market value for the note. TI1e interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2008, and the interest expense to be reported in 2008 related to this transaction.

(b) On January 1, 2008, Sally Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Sally Field Furniture agreed to sell furniture to this customer at lower than market price. A JO% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2008.


(a) Face value of the zero-interest-bearing note $550,000 Discounting factor (12% for 3 periods) X .71178 Amount to be recorded for the land at January 1, 2008 $391,479

Carrying value of the note at January 1, 2008 $391,479 Applicable interest rate (12%) X .12 Interest expense to be reported in 2008 $ 46,977

(b) January 1, 2008 Cash ........................................................................ 5,000,000 Discount on Notes Payable ............................. 1,584,950 Notes Payable ........................................... 5,000,000 Unearned Revenue .................................. 1,584,950*

*$5,000,000 ($5,000,000 X .68301) = $1,584,950

Carrying value of the note at January 1, 2008 $3,415,050** Applicable interest rate (10%) X .10 Interest expense to be reported for 2008 $ 341,505

**$5,000,000 $1,584,950 = $3,415,050

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ACCT 2062 Homework #2