1.
On January 1, 2015, Boston Enterprises issues bonds that have a $3,400,000 par value, mature in 20 years, and pay 9% interest semiannually on June 30 and December 31. The bonds are sold at par.
| 1. |
How much interest will Boston pay (in cash) to the bondholders every six months?
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| Par (maturity) Value | | Semiannual Rate | | Semiannual Cash Interest Payment |
| $3,400,000 | x | 4.5% | = | $153,000 |
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| 2. |
Prepare journal entries to record (a) the issuance of bonds on January 1, 2015; (b) the first interest payment on June 30, 2015; and (c) the second interest payment on December 31, 2015.
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| Date | General Journal | Debit | Credit |
| Jan 01, 2015 | Cash | 3,400,000 | |
| Bonds payable | | 3,400,000 |
| | | |
| Jun 30, 2015 | Bond interest expense | 153,000 | |
| Cash | | 153,000 |
| | | |
| Dec 31, 2015 | Bond interest expense | 153,000 | |
| Cash | | 153,000 |
| 3. | Prepare the journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102. |
| Date | General Journal | Debit | Credit |
| Jan 01, 2015 | Cash | 3,332,000 | |
| Discount on bonds payable | 68,000 | |
| Bonds payable | | 3,400,000 |
| | | |
| Jan 01, 2015 | Cash | 3,468,000 | |
| Premium on bonds payable | | 68,000 |
| Bonds payable | | 3,400,000 |
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Questions 2-8
[The following information applies to the questions displayed below.]
On January 1, 2015, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾. Six years later, on January 1, 2021, Shay retires 20% of these bonds by buying them on the open market at 104½. All interest is accounted for and paid through December 31, 2020, the day before the purchase. The straight-line method is used to amortize any bond discount.
2-8
| 1. |
How much does the company receive when it issues the bonds on January 1, 2015?
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| Cash proceeds from sale of bonds at issuance | $684,250 |
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| 2. |
What is the amount of the discount on the bonds at January 1, 2015?
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| Amount of discount | $15,750 |
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| 3. |
How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2015, through December 31, 2020?
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| Amortization of discount | $6,300 |
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| 4. |
What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2020?
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| Entire Group | Retired 20% |
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| Par value | $700,000 | $140,000 |
| Remaining discount | (9,450) | (1,890) |
| Carrying value | $690,550 | $138,110 |
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| 5. |
How much did the company pay on January 1, 2021, to purchase the bonds that it retired?
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| 6. |
What is the amount of the recorded gain or loss from retiring the bonds?
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| Loss on retirement | $(8,190) |
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| 7. |
Prepare the journal entry to record the bond retirement at January 1, 2021.
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| Date | General Journal | Debit | Credit |
| Jan 01, 2021 | Bonds payable | 140,000 | |
| Loss on retirement of bonds payable | 8,190 | |
| Discount on bonds payable | | 1,890 |
| Cash | | 146,300 |
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9.
On January 1, 2015, Eagle borrows $100,000 cash by signing a four-year, 7% installment note. The note requires four equal total payments of accrued interest and principal on December 31 of each year from 2015 through 2018. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)
| 1. |
Compute the amount of each of the four equal total payments.
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| Interest Rate | Initial Note Balance | | Table Value | | Amount of Each Payment |
| 7.0% | $100,000 | / | 3.3872 | = | $29,523 |
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| 2. |
Prepare an amortization table for this installment note. (Round all amounts to the nearest whole dollar.)
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| Payments |
| (A) | (B) | (C) | (D) | (E) |
| Period | | | | | |
| Ending | Beginning | Debit Interest | Debit Notes | Credit | Ending |
| Date | Balance | Expense | Payable | Cash | Balance |
| 2015 | $100,000 | $7,000 | $22,523 | $29,523 | $77,477 |
| 2016 | 77,477 | 5,423 | 24,100 | 29,523 | 53,377 |
| 2017 | 53,377 | 3,736 | 25,786 | 29,523 | 27,590 |
| 2018 | 27,590 | 1,932 | 27,591 | 29,523 | 0 |
| Total | | $18,091 | $100,000 | $118,092 |
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10.
Hillside issues $4,000,000 of 6%, 15-year bonds dated January 1, 2015, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $3,456,448.
| Required: |
| 1. |
Prepare the January 1, 2015, journal entry to record the bonds’ issuance.
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| Date | General Journal | Debit | Credit |
| Jan 01, 2015 | Cash | 3,456,448 | |
| Discount on bonds payable | 543,552 | |
| Bonds payable | | 4,000,000 |
| 2(a) |
For each semiannual period, complete the table below to calculate the cash payment.
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| Par (maturity) value | | Annual Rate | | Year | | Semiannual cash interest payment |
| $4,000,000 | x | 6% | x | 6/12 | = | $120,000 |
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| 2(b) |
For each semiannual period, complete the table below to calculate the straight-line discount amortization.
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| Par (maturity) value | | Bonds price | | Discount on Bonds Payable | | Semiannual periods | | Straight-line discount amortization |
| $4,000,000 | - | $3,456,448 | = | $543,552 | ÷ | 30 | = | $18,118 |
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| 2(c) |
For each semiannual period, complete the table below to calculate the bond interest expense.
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| Semiannual cash payment | | Discount amortization | | Bond interest expense |
| $120,000 | + | $18,118 | = | $138,118 |
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| 3. |
Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life.
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| Total bond interest expense over life of bonds: |
| Amount repaid: |
| 30 | payments of | $120,000 | $3,600,000 |
| Par value at maturity | 4,000,000 |
| Total repaid | 7,600,000 |
| Less amount borrowed | (3,456,448) |
| Total bond interest expense | $4,143,552 |
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| 4. |
Prepare the first two years of an amortization table using the straight-line method.
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| Semiannual Period-End | Unamortized Discount | Carrying Value |
| 01/01/2015 | $543,552 | $3,456,448 |
| 06/30/2015 | 525,434 | 3,474,566 |
| 12/31/2015 | 507,316 | 3,492,684 |
| 06/30/2016 | 489,198 | 3,510,802 |
| 12/31/2016 | 471,080 | 3,528,920 |
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| 5. |
Prepare the journal entries to record the first two interest payments.
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| Date | General Journal | Debit | Credit |
| Jun 30, 2015 | Bond interest expense | 138,118 | |
| Discount on bonds payable | | 18,118 |
| Cash | | 120,000 |
| | | |
| Dec 31, 2015 | Bond interest expense | 138,118 | |
| Discount on bonds payable | | 18,118 |
| Cash | | 120,000 |
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11.
At the end of the current year, the following information is available for both Pulaski Company and Scott Company.
| Pulaski Company | Scott Company |
| Total assets | $ | 860,000 | $ | 440,000 |
| Total liabilities | | 360,000 | | 240,000 |
| Total equity | | 500,000 | | 200,000 |
|
| Required: |
| 1. |
Compute the debt-to-equity ratios for both companies.
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| Choose Numerator: | / | Choose Denominator: | |
| Total liabilities | / | Total equity | Debt-to-Equity Ratio |
| Pulaski Company | $360,000 | / | $500,000 | = | 0.72 |
| Scott Company | $240,000 | / | $200,000 | = | 1.20 |
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Questions 12-16
[The following information applies to the questions displayed below.]
Ike issues $180,000 of 11%, three-year bonds dated January 1, 2015, that pay interest semiannually on June 30 and December 31. They are issued at $184,566. Their market rate is 10% at the issue date.
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12.
| Required: |
| 1. |
Prepare the January 1, 2015, journal entry to record the bonds' issuance.
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| Date | General Journal | Debit | Credit |
| Jan 01, 2015 | Cash | 184,566 | |
| Premium on bonds payable | | 4,566 |
| Bonds payable | | 180,000 |
13.
| 2. |
Complete the below table to calculate the total bond interest expense to be recognized over the bonds’ life.
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| Total bond interest expense over life of bonds: |
| Amount repaid: |
| 6 | payments of | $9,900 | $59,400 |
| Par value at maturity | 180,000 |
| Total repaid | 239,400 |
| Less amount borrowed | (184,566) |
| Total bond interest expense | $54,834 |
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14.
| 3. |
Prepare an effective interest amortization table for the bonds’ first two years. (Enter all amounts positive values. Round your final answers to the nearest whole dollar.)
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| Semiannual Interest Period-End | Cash Interest Paid | Bond Interest Expense | Premium Amortization | Unamortized Premium | Carrying Value |
| 01/01/2015 | | $4,566 | $184,566 |
| 06/30/2015 | $9,900 | $9,228 | $672 | 3,894 | 183,894 |
| 12/31/2015 | 9,900 | 9,195 | 705 | 3,189 | 183,189 |
| 06/30/2016 | 9,900 | 9,159 | 741 | 2,448 | 182,448 |
| 12/31/2016 | 9,900 | 9,122 | 778 | 1,670 | 181,670 |
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15.
| 4. |
Prepare the journal entries to record the first two interest payments.
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| Date | General Journal | Debit | Credit |
| Jun 30, 2015 | Bond interest expense | 9,228 | |
| Premium on bonds payable | 672 | |
| Cash | | 9,900 |
| | | |
| Dec 31, 2015 | Bond interest expense | 9,195 | |
| Premium on bonds payable | 705 | |
| Cash | | 9,900 |
16.
| 5. |
Prepare the journal entry to record the bonds' retirement on January 1, 2017, at 98.
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| Date | General Journal | Debit | Credit |
| Jan 01, 2017 | Bonds payable | 180,000 | |
| Premium on bonds payable | 1,670 | |
| Cash | | 176,400 |
| Gain on retirement of bonds payable | | 5,270 |
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17.
Bringham Company issues bonds with a par value of $800,000 on their stated issue date. The bonds mature in 10 years and pay 6% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)
| 1. |
What is the amount of each semiannual interest payment for these bonds?
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| Par (maturity) value | | Semiannual Rate | | Semiannual cash interest payment |
| $800,000 | x | 3% | = | $24,000 |
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| 2. |
How many semiannual interest payments will be made on these bonds over their life?
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| 3. |
Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.
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At a discount. 
| 4. |
Compute the price of the bonds as of their issue date.
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| Table Values are Based on: |
| n = | 20 | |
| i = | 4.0% |
| Cash Flow | Table Value | | Amount | | Present Value |
| Par (maturity) value | 0.4564 | x | $800,000 | = | $365,120 |
| Interest (annuity) | 13.5903 | x | $24,000 | = | 326,167 |
| Price of bonds | | $691,287 |
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| 5. |
Prepare the journal entry to record the bonds’ issuance.
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| Transaction | General Journal | Debit | Credit |
| 1 | Cash | 691,287 | |
| Discount on bonds payable | 108,713 | |
| Bonds payable | | 800,000 |
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18.
Citywide Company issues bonds with a par value of $150,000 on their stated issue date. The bonds mature in five years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)
| 1. |
What is the amount of each semiannual interest payment for these bonds?
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| Par (maturity) value | | Semiannual Rate | | Semiannual cash interest payment |
| $150,000 | x | 5% | = | $7,500 |
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| 2. |
How many semiannual interest payments will be made on these bonds over their life?
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| 3. |
Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.
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| At a premium |
| 4. |
Compute the price of the bonds as of their issue date.
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| Table Values are Based on: |
| n = | 10 | |
| i = | 4.0% |
| Cash Flow | Table Value | | Amount | | Present Value |
| Par (maturity) value | 0.6756 | x | $150,000 | = | $101,340 |
| Interest (annuity) | 8.1109 | x | $7,500 | = | 60,832 |
| Price of bonds | | $162,172 |
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| 5. |
Prepare the journal entry to record the bonds’ issuance. (Round intermediate calculations to the nearest dollar amount.)
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| Transaction | General Journal | Debit | Credit |
| 1 | Cash | 162,172 | |
| Premium on bonds payable | | 12,172 |
| Bonds payable | | 150,000 |
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19.
Stanford issues bonds dated January 1, 2015, with a par value of $500,000. The bonds' annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $463,140.
| 1. |
What is the amount of the discount on these bonds at issuance?
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| 2. |
How much total bond interest expense will be recognized over the life of these bonds?
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| Total bond interest expense over life of bonds: |
| Amount repaid: |
| 6 | payments of | $22,500 | $135,000 |
| Par value at maturity | 500,000 |
| Total repaid | 635,000 |
| Less amount borrowed | (463,140) |
| Total bond interest expense | $171,860 |
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| 3. |
Prepare an Amortization table using the effective interest method to amortize the discount for these bonds. (Enter all amounts positive values. Round all amounts to the nearest whole dollar.)
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| Semiannual Interest Period-End | Cash Interest Paid | Bond Interest Expense | Discount Amortization | Unamortized Discount | Carrying Value |
| 01/01/2015 | | $36,860 | $463,140 |
| 06/30/2015 | $22,500 | $27,788 | $5,288 | 31,572 | 468,428 |
| 12/31/2015 | 22,500 | 28,106 | 5,606 | 25,966 | 474,034 |
| 06/30/2016 | 22,500 | 28,442 | 5,942 | 20,024 | 479,976 |
| 12/31/2016 | 22,500 | 28,799 | 6,299 | 13,725 | 486,275 |
| 06/30/2017 | 22,500 | 29,176 | 6,676 | 7,049 | 492,951 |
| 12/31/2017 | 22,500 | 29,549 | 7,049 | 0 | 500,000 |
| Total | $135,000 | $171,860 | $36,860 |
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20.
Quatro Co. issues bonds dated January 1, 2015, with a par value of $400,000. The bonds’ annual contract rate is 13%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $409,850.
| 1. |
What is the amount of the premium on these bonds at issuance?
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| 2. |
How much total bond interest expense will be recognized over the life of these bonds?
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| Total bond interest expense over the life of the bonds: |
| Amount repaid: |
| 6 | payments of | $26,000 | $156,000 |
| Par value at maturity | 400,000 |
| Total repaid | 556,000 |
| Less amount borrowed | (409,850) |
| Total bond interest expense | $146,150 |
|
| 3. |
Prepare an amortization table for these bonds using the effective interest method to amortize the premium. (Enter all amounts positive values. Round your intermediate calculations to the nearest dollar amount.)
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| Semiannual Interest Period-End | Cash Interest Paid | Bond Interest Expense | Premium Amortization | Unamortized Premium | Carrying Value |
| 01/01/2015 | | $9,850 | $409,850 |
| 06/30/2015 | $26,000 | $24,591 | $1,409 | 8,441 | 408,441 |
| 12/31/2015 | 26,000 | 24,506 | 1,494 | 6,947 | 406,947 |
| 06/30/2016 | 26,000 | 24,417 | 1,583 | 5,364 | 405,364 |
| 12/31/2016 | 26,000 | 24,322 | 1,678 | 3,686 | 403,686 |
| 06/30/2017 | 26,000 | 24,221 | 1,779 | 1,907 | 401,907 |
| 12/31/2017 | 26,000 | 24,093 | 1,907 | 0 | 400,000 |
| Total | $156,000 | $146,150 | $9,850
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