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190.
Bonds payable-issued between interest dates
Barney Corporation received authorization on December 31, Year 1, to issue $2,500,000 of
6%, 10-year bonds. The interest payment dates are June 30 and December 31. All the
bonds were issued at a price of 100, plus accrued interest, on February 28, Year 2, two
months after the authorization of the bond issue.
(d) Prepare the journal entry at February 28, Year 2, to record the issuance of the bonds.
(e) Prepare the journal entry at June 30, Year 2 to record the first semiannual interest
payment on the bonds.
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191.
Bonds payable issued between interest dates - early retirement
Deegan Imports received authorization on December 31, Year 1, to issue $4,500,000 face
value of 8%, 20-year bonds. The interest payment dates are June 30 and December 31. All
the bonds were issued at par, plus accrued interest on February 1, Year 2. The bonds are
callable by Deegan at any time at 105.
(a) Prepare the journal entry to record the issuance of the bonds on February 1, Year 2.
(b) Prepare the journal to record the first interest payment on the bonds at June 30, Year 2
(c) What is the amount of bond interest expense reported in Deegan Imports' Year 2
income statement relating to these bonds? $____________
(d) What is the amount of bond interest payable appearing in Deegan Imports' balance
sheet at December 31, Year 2, with respect to these bonds? $_____________
(e) Deegan exercises the call provision and retires one-third of the bond issue on July 1,
Year 3.
Prepare the journal entry to record this transaction on July 1, Year 3.
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192.
Bonds issued at discount or premium
On March 31, 2015 Louis Company issued $20,000,000 face amount of 7%, 5-year bonds
payable, with interest payable each June 30 and December 31. The company received
cash of $20,200,000, including the accrued interest from December 31, 2014. Louis uses
the straight-line method of amortizing any discount or premium over the remaining life of
the bonds - 57 months.
(a) What was the amount of accrued interest received by Louis on March 31, 2015 when
the bonds were issued? (Do not assume the bonds were issued at par.)
$________________
(b) What was the amount of discount or premium on the bonds at issuance date?
(Indicate discount or premium.)
$________________
(c) What amount of cash is paid to bondholders for interest during year 2015?
$________________
(d) What is Louis' total interest expense for year 2015 related to this bond issue?
$________________
(e) What is the carrying value of this bond issue as of December 31, year 2015?
$________________
193.
On March 1, 2015, five-year bonds are sold for $508,026 that have a face value of
$500,000 and an interest rate of 10%. Interest is paid semi-annually on March 1 and
September 1. Using the straight-line amortization method, prepare the borrower's journal
entries on:
March 1, 2015; September 1, 2015; December 31, 2015; and March 1, 2016.
194.
Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms.
In the space provided beside each statement, indicate the accounting term described, or
answer "None" if the statement does not correctly describe any of the terms.
_____ (a) Operating income divided by annual interest expense.
_____ (b) The amount paid during the current period to retired employees.
_____ (c) A lease agreement that is viewed as equivalent to the lessee purchasing the
leased asset.
_____ (d) Using borrowed money to finance business operations.
_____ (e) The risk of a loss occurring in a future period.
_____ (f) A permanent reduction in the amount of income taxes owed which results from
the tax deductions for depreciation.
_____ (g) The amount that must be paid to settle a liability at the date it becomes due.
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195.
Operating and capital leases
Berkeley Corporation wants to expand operations and is considering various leasing
arrangements for additional equipment. Berkeley's management has heard the terms
capital lease and operating lease mentioned by the accounting department and wants
clarification of these terms before signing any lease contracts.
(a) Briefly explain the difference between a capital lease and an operating lease from a
lessee's (Berkeley's) point of view. Your answer should include the financial statement
impact of each type of lease.
(b) How does a lessee determine whether a specific lease contract is an operating lease
or a capital lease? Include at least two of the criteria specified by the FASB in your
answer.
(c) Which of the above two types of leases is sometimes referred to as "off-balance-sheet
financing?" Briefly explain.
196.
Deferred income taxes
At the end of its first year of operations, Harding Construction, Inc., included in its balance
sheet a long-term liability entitled "Deferred Income Taxes."
(a) Briefly explain what deferred income taxes represents, including how this liability came
into existence and whether such an item is generally perceived as favorable or unfavorable
from company management's point of view.
(b) If Harding Construction, Inc., is a successful, growing business, would you expect the
liability for deferred income taxes to increase or decrease over the next few years?
Explain.
197.
Loss contingencies
Ocean to Coast Airlines could, at any time, incur a large loss if one of its airplanes were to
crash. Is this an example of a loss contingency which should be disclosed in the
company's financial statements? Explain.
