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Chapter 14: 3E (page 755)

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

Short Answer

Expert verified

The bond is issued at$200,000

(b) On July 1, interest is paid on 9% bonds is$4,500 and on 12% bonds is$6,000.

(c) On Dec 31, the accrued interest on 9% bonds payable is$4500and on 12% bonds payable is$6,000.

Step by step solution

01

Meaning of Journal Entry

The journal entry means the business's day-to-day transactions are recorded in the books of accounts at the end of the accounting period.

02

Preparation of journal entries for Company Simon

Simon Company

Journal entries

Date

Account and explanation

Debit ($)

Credit ($)

Jan 1, 2017

Cash

200,000

Bonds payable

200,000

(To bonds are issued)

July 1, 2017

Interest expense

4,500

Cash

4,500

(To interest expense paid)

Dec 31, 2017

Interest expenses

4,500

Interest payable

4,500

(To record interest payable)

03

Preparation of journal entries for Company Garfunkel

Garfunkel Company

Journal entries

Date

Account and explanation

Debit ($)

Credit ($)

Jan 1

Cash

105,000

Bonds payable

100,000

Interest expense

5,000

(To bonds are issued)

July 1

Interest expense

6,000

Cash

6,000

(To interest paid to the bond-holders)

Dec 31

Interest expenses

6,000

Interest payable

6,000

(To interest is payable on January 1, 2018, is recorded)

Working notes:

Calculation of quarterly interest

QuaterlyInterestperyear=$200,000脳9100脳14=$4500Perquarter

Calculation of interest on bond

Interestonbond=$100,000脳12100脳512=$5,000

Calculation of semi annual interest on bonds payable

Semi-annualInterest=$100,000脳12100脳612=$6,000

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Most popular questions from this chapter

On January 1, 2017, Ellen Carter Company makes the two following acquisitions.

  1. Purchases land having a fair value of \(200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of \)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

(Round answers to the nearest cent.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company鈥檚 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

(Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from Plato Corporation by issuing a \(600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company鈥檚 credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a \)70,000 salvage value.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entry for purchase on December 31, 2017.

(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2018.

(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.

On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of \(500,000 for \)537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

  1. Prepare the journal entry at the date of the bond issuance.
  2. Prepare a schedule of interest expense and bond amortization for 2017鈥�2019.
  3. Prepare the journal entry to record the interest payment and the amortization for 2017.
  4. Prepare the journal entry to record the interest payment and the amortization for 2019.

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a 鈥渄ebtor in possession,鈥� he has negotiated the following revised loan agreement with United Bank. Perkins Inc.鈥檚 \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.
See all solutions

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