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Chapter 14: 14-27Q_b (page 753)
(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?
The concession that the creditor might grant in a troubled-debt situation is to diminish the face amount of the obligation.
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Question: Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.
E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).
Instructions
Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)
The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2011, and the subsequent interest payments and charges. The company鈥檚 year-end is December 31, and financial statements are prepared once yearly.
| Amortization Schedule | ||||
Year | Cash | Interest | Amount unamortized | Carrying value |
1/1/2011 | \(5,651 | \)94,349 | ||
2011 | \(11,000 | \)11,322 | 5,329 | 94,671 |
2012 | 11,000 | 11,361 | 4,968 | 95,032 |
2013 | 11,000 | 11,404 | 4,564 | 95,436 |
2014 | 11,000 | 11,452 | 4,112 | 95,888 |
2015 | 11,000 | 11,507 | 3,605 | 95,395 |
2016 | 11,000 | 11,567 | 3,038 | 96,962 |
2017 | 11,000 | 11,635 | 2,403 | 97,597 |
2018 | 11,000 | 11,712 | 1,691 | 98,309 |
2019 | 11,000 | 11,797 | 894 | 99,106 |
2020 | 11,000 | 11,894 | 100,000 | |
Instructions
(a) Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.
(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.
(c) Determine the stated interest rate and the effective-interest rate.
(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.
(e) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid on January 1.)
(f) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.
On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company鈥檚 credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.
Instructions
In each of the following independent cases, the company closes its books on December 31.
1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.
2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.
Instructions
For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)
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