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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.