EXERCISE 14-9

(a)	1.	June 30, 2005
		Cash...................................................	4,300,920.00
		Bonds Payable.....................		4,000,000.00
		Premium on Bonds Payable		300,920.00
	2.	December 31, 2005
		Bond Interest Expense.................	258,055.20
		($4,300,920.00 X 12% X 6/12)
		Premium on Bonds Payable.........	1,944.80
		Cash........................................		260,000.00
		($4,000,000 X 13% X 6/12)
	3.	June 30, 2006
		Bond Interest Expense.................	257,938.51
		[($4,300,920.00 – $1,944.80)
		X 12% X 6/12]
		Premium on Bonds Payable.......	2,061.49
		Cash........................................		260,000.00
	4.	December 31, 2006
		Bond Interest Expense.................	257,814.82
		[($4,300,920.00 – $1,944.82 –
		$2,061.49) X 12% X 6/12]
		Premium on Bonds Payable.......	2,185.18
		Cash........................................		260,000.00

EXERCISE 14-9 (Continued)

(b)	Long-term Liabilities:
	Bonds payable, 13% (due on June 30, 2025)	$4,000,000.00
	Premium on Bonds Payable*	294,728.53
	Book value of bonds payable	$4,294,728.53
	*($4,300,920.00 – $4,000,000) – ($1,944.80 + $2,061.49 + $2,185.18) = $294,728.53

(c)	1.	Interest expense for the period from
		January 1 to June 30, 2006 from (a) 3.	$257,938.51
		Interest expense for the period from
		July 1 to December 31, 2006 from (a) 4.	257,814.82
		Amount of bond interest expense
		reported for 2006	$515,753.33

2.

The amount of bond interest expense reported in 2006 will be greater than the amount that would be reported if the straight-line method of amortization were used. Under the straight-line method, the amortization of bond premium is $15,046 ($300,920/20). Bond interest expense for 2006 is the difference between the amortized premium, $15,046, and the actual interest paid, $520,000 ($4,000,000 X 13%). Thus, the amount of bond interest expense is $504,954, which is smaller than the bond interest expense under the effective interest method.

3.	Total interest to be paid for the bond
	($4,000,000 X 13% X 20)	$10,400,000
	Principal due in 2025	4,000,000
	Total cash outlays for the bond	14,400,000
	Cash received at issuance of the bond	(4,300,920)
	Total cost of borrowing over the life
	of the bond	$10,099,080
4.	They will be the same.

EXERCISE 14-15

Reacquisition price ($300,000 X 104%)............		$312,000
Less: Net carrying amount of bonds redeemed:
Par value.....................................................	$300,000
Unamortized discount..............................	(10,000)	290,000
Loss on redemption.............................................		$ 22,000
Bonds Payable......................................................	300,000
Loss on Redemption of Bonds..........................	22,000
Discount on Bonds Payable.....................		10,000
Cash...............................................................		312,000
(To record redemption of bonds
payable)
Cash..........................................................................	306,000
Unamortized Bond Issue Costs.........................	3,000
Premium on Bonds Payable.....................		9,000
Bonds Payable............................................		300,000
(To record issuance of new bonds)

EXERCISE 14-16 (15-20 minutes)

(a)	1.	January 1, 2005
		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		$250,000.00
		Present value of $250,000 due in
		8 years at 11%—$250,000
		X .43393	$108,482.50
		Present value of $15,000
		payable annually for 8 years
		at 11% annually—$15,000
		X 5.14612	77,191.80
		Present 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

PROBLEM 14-2

(a)	Present value of the principal
	$1,500,000 X .38554 (PV10, 10%)	$ 578,310
	Present value of the interest payments
	$157,500* X 6.14457 (PVOA10, 10%)	967,770
	Present value (selling price of the bonds)	$1,546,080

*$1,500,000 X 10.5% = $157,500

Cash......................................................................	1,496,080
Unamortized Bond Issue Costs.....................	50,000
Bonds Payable........................................		1,500,000
Premium Bonds Payable.......................		46,080

(b)	Date		Cash Price		Interest Expense		Premium Amortization		Carrying Amount of Bonds
	1/1/02							$1,546,080
	1/1/03	$157,500		$154,608		$2,892		1,543,188
	1/1/04	157,500		154,319		3,181		1,540,007
	1/1/05	157,500		154,001		3,499		1,536,508
	1/1/06	157,500		153,651		3,849		1,532,659

(c)	Carrying amount as of 1/1/05	$1,536,508
	Less: Amortization of bond premium
	(3,849 ¸ 2)	1,925
	Carrying amount as of 7/1/05	$1,534,583

Reacquisition price		$800,000
Carrying amount as of 7/1/05
(1,534,583 ¸ 2)		(767,292)
Loss		$32,708
Entry for accrued interest
Interest Expense	38,413
Premium on Bonds Payable	962
($3,849 X 1/2 X 1/2)
Cash		39,375
($157,500 X 1/2 X 1/2)

Entry for reacquisition
Bonds Payable	750,000
Premium on Bonds Payable	17,292*
Loss on Redemption of Bonds	32,708
Cash		800,000
*Premium as of 7/1/02 to be written off
($1,534,582 – $1,500,000,000) X 1/2 = $17,292

The loss is reported as an ordinary loss under SFAS No. 145.

PROBLEM 14-4

(a)	Entry to record the issuance of the 11% bonds on December 18, 2004:
	Cash......................................................................	6,120,000
	Bonds Payable........................................		6,000,000
	Premium on Bonds Payable.................		120,000

Entry to record the retirement of the 9% bonds on January 2, 2005:
Bonds Payable..................................................	5,000,000
Loss on Redemption of Bonds......................	300,000
Discount on Bonds Payable.................		100,000
($250,000 X 10/25)
Cash ($5,000,000 x 104%)......................		5,200,000
[The loss represents the excess of the
cash paid ($5,200,000) over the
carrying amount of the bonds
($4,900,000).]

(b) The loss is reported as an ordinary loss under SFAS No. 145.

Note 1. Loss on Bond Redemption

The loss represents a loss of $300,000 from the redemption and retirement of $5,000,000 of the Company’s outstanding bond issue due in 2015. The funds used to purchase the mortgage bonds represent a portion of the proceeds from the sale of $6,000,000 of 11% debenture bonds issued December 18, 2004 and due in 2024.

PROBLEM 14-5

(This solution assumes that no reversing entries have been made.)

1. Danny Ferry Co.
3/1/04	Cash................................................................	236,045
	Discount on Bonds Payable.....................	13,955
	Bonds Payable..................................		250,000
Maturity value of bonds payable			$250,000
Present value of $250,000 due in 7 periods at 6%
($250,000 X .66506)		$166,265
Present value of interest payable semiannually
($12,500 X 5.58238)		69,780
Proceeds from sale of bonds			(236,045)
Discount on bonds payable			$ 13,955

9/1/04	Interest Expense.....................................	14,163
	Discount on Bonds Payable.......		1,663
	Cash.................................................		12,500
12/31/04	Interest Expense.....................................	9,508
	Discount on Bonds Payable.......		1,175
	($1,762 X 4/6)
	Interest Payable ($12,500 X 4/6).		8,333
3/1/05	Interest Expense.....................................	4,754
	Interest Payable.......................................	8,333
	Discount on Bonds Payable.......		587
	($1,762 X 2/6)
	Cash.................................................		12,500
9/1/05	Interest Expense.....................................	14,368
	Discount on Bonds Payable.......		1,868
	Cash.................................................		12,500
12/31/05	Interest Expense.....................................	9,653
	Discount on Bonds Payable.......		1,320
	($1,980 X 4/6)
	Interest Payable.............................		8,333

PROBLEM 14-5 (Continued)

Schedule of Bond Discount Amortization
Effective Interest Method
10% Bonds Sold to Yield 12%
Date	Credit Cash	Debit Interest Expense	Credit Bond Discount	Carrying Value of Bonds
3/1/04				$236,045
9/1/04	$12,500	$14,163	$1,663	237,708
3/1/05	12,500	14,262	1,762	239,470
9/1/05	12,500	14,368	1,868	241,338
3/1/06	12,500	14,480	1,980	243,318
9/1/06	12,500	14,599	2,099	245,417
3/1/07	12,500	14,725	2,225	247,642
9/1/07	12,500	14,858	2,358	250,000

2. Dougherty Co.
6/1/04	Cash................................................................	638,780
	Premium on Bonds Payable...........		38,780
	Bonds Payable..................................		600,000
Maturity value of bonds payable			$600,000
Present value of $600,000 due in 8 periods at 5%
($600,000 X .67684)		$406,104
Present value of interest payable semiannually
($36,000 X 6.46321)		232,676
Proceeds from sale of bonds			638,780
Premium on bonds payable			$ 38,780

12/1/04	Interest Expense.....................................	31,939
	Premium on Bonds Payable.................	4,061
	Cash ($600,000 X .12 X 6/12).......		36,000
12/31/04	Interest Expense ($31,736 X 1/6)..........	5,289
	Premium on Bonds Payable... Payable	711
	($4,264 X 1/6)
	Interest Payable ($36,000 X 1/6).		6,000

PROBLEM 14-5 (Continued)

6/1/05	Interest Expense ($31,736 X 5/6)..........	26,447
	Interest Payable.......................................	6,000
	Premium on Bonds Payable.................	3,553
	($4,264 X 5/6)
	Cash.................................................		36,000
10/1/05	Interest Expense.....................................	4,203
	($31,523 X .2* X 4/6)
	Premium on Bonds Payable.................	597
	($4,477 X .2 X 4/6)
	Cash.................................................		4,800
	*$120,000 ¸ $600,000 = .2
10/1/05	Bonds Payable........................................	120,000
	Premium on Bonds Payable.................	5,494
	Gain on Redemption of Bonds...		4,294
	Cash.................................................		121,200
Reacquisition price
($126,000 – $120,000 X 12% X 4/12)			$121,200
Net carrying amount of bonds redeemed:
Par value		$120,000
Unamortized premium
[.2 X ($38,780 – $4,061 – $4,264) – $597]		5,494	(125,494)
Gain on redemption			$ (4,294)

12/1/05	Interest Expense ($31,523 X .8*)..........	25,218
	Premium on Bonds Payable.................	3,582
	($4,477 X .8)
	Cash ($36,000 X .8)........................		28,800
	*($600,000 – $120,000) ¸ $600,000 = .8
12/31/05	Interest Expense.....................................	4,173
	($31,299 X .8 X 1/6)
	Premium on Bonds Payable.................	627
	($4,701 X .8 X 1/6)
	Interest Payable.............................		4,800
	($36,000 X .8 X 1/6)

6/1/06	Interest Expense ($31,299 X .8 X 5/6)..	20,866
	Interest Payable.......................................	4,800
	Premium on Bonds Payable.................	3,134
	($4,701 X .8 X 5/6)
	Cash ($36,000 X .8)........................		28,800
12/1/06	Interest Expense ($31,064 X .8)............	24,851
	Premium on Bonds Payable.................	3,949
	($4,936 X .8)
	Cash ($36,000 X .8)........................		28,800

Date	Cash Credit	Debit Interest Expense	Debit Bond Premium	Carrying Value of Bonds
6/1/04				$638,780
12/1/04	$36,000	$31,939	$4,061	634,719
6/1/05	36,000	31,736	4,264	630,455
12/1/05	36,000	31,523	4,477	625,978
6/1/06	36,000	31,299	4,701	621,277
12/1/06	36,000	31,064	4,936	616,341
6/1/07	36,000	30,817	5,183	611,158
12/1/07	36,000	30,558	5,442	605,716
6/1/08	36,000	30,284*	5,716	600,000

*$1.80 adjustment due to rounding.

PROBLEM 14-9

(a)	12/31/03	Machinery.......................................		131,120.50
		Discount on Notes Payable.........		28,879.50
		Cash........................................			40,000.00
		Notes Payable.......................			120,000.00
		[To record machinery at the
		present value of the note plus
		the immediate cash payment:
		PV of $30,000 annuity @ 12%
		for 4 years ($30,000 X
		3.03735)	$ 91,120.50
		Down payment	40,000.00
		Capitalized value of
		machinery	$131,120.50

(b)	12/31/04	Notes Payable................................	30,000.00
		Cash........................................		30,000.00
		Interest Expense............................	10,934.46
		Discount on Notes Payable		10,934.46

Schedule of Note Discount Amortization
Date	Debit, Interest Expense Credit, Discount on Notes Payable	Credit Cash	Carrying Value of Note
12/31/03			$91,120.50
12/31/04	$10,934.46	$30,000.00	72,054.96*
12/31/05	8,646.60	30,000.00	50,701.56
12/31/06	6,084.19	30,000.00	26,785.75
12/31/07	3,214.25**	30,000.00	—

*$72,054.96 = $91,120.50 + $10,934.46 – $30,000.00.

**$0.04 adjustment due to rounding.

(c)	12/31/05	Notes Payable................................	30,000.00
		Cash........................................		30,000.00
		Interest Expense............................	8,646.60
		Discount on Notes Payable		8,646.60
(d)	12/31/06	Notes Payable................................	30,000.00
		Cash........................................		30,000.00
		Interest Expense............................	6,084.19
		Discount on Notes Payable		6,084.19
(e)	12/31/07	Notes Payable................................	30,000.00
		Cash........................................		30,000.00
		Interest Expense............................	3,214.25
		Discount on Notes Payable		3,214.25

PROBLEM 14-10

(a)	Heide Co.
	Selling price of the bonds ($3,000,000 X 103%)	$3,090,000
	Accrued interest from January 1 to February
	28, 2005 ($3,000,000 X 9% X 2/12)	45,000
	Total cash received from issuance of the bonds	3,135,000
	Less: Bond issuance costs	27,000
	Net amount of cash received	$3,108,000

(b)	Reymont Co.
	Carrying amount of the bonds on 1/1/04	$469,280
	Effective interest rate (10%)	X 0.10
	Interest expense to be reported for 2004	$ 46,928

(c)	Czeslaw Building Co.
	Maturities and sinking fund requirements on long-term debt for the next five year are as follows:
		2006	$400,000	2009	$200,000
		2007	350,000	2010	350,000
		2008	200,000

(d)	Marie Curie Inc.
	Since three bonds reported by Marie Curie Inc. are secured either real estate, securities of other corporations, or plant the company.