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110) On October 1, 2019, Jack Company issued a $5,000, 6%, bond payable. The interest is
payable annually each September 30 and the bond matures in five years. The annual accounting
period for the company ends December 31.
Complete the following entries at the date specified under three different assumptions as to the
issue price. Use straight-line amortization. Assume no adjusting entries have been made during
the year.
Entry
Assumed Issue Price
@ Par
@ 94
@ 106
Debit
Credit
Debit
Credit
Debit
Credit
Record issuance:
October 1, 2019
Cash
Bond discount
Bond premium
Bonds payable
Record adjusting entry:
December 31, 2019
Bond interest expense
Bond discount
Bond premium
Bond interest payable
Record interest payment:
October 1, 2020
Bond interest expense
Bond interest payable
Bond discount
Bond premium
Cash
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111) Ridgetop Company issued the following ten-year bonds on January 1, 2019: $100,000
maturity value, 5% interest payable annually on each December 31. The bonds were dated
January 1, 2019 and the accounting period ends December 31. The bonds were issued for
$93,000. Ridgetop uses the effective-interest method for amortization. The amortization for 2019
was $580.
A.
Determine the following:
1.
Cash inflow at date of issuance
Information for the entire 10-year period:
2.
Principal cash outflow
3.
Total interest cash outflow
4.
Total interest expense
5.
Coupon interest rate
Income statement for the year 2019:
6.
Interest expense for 2019
Balance Sheet at December 31, 2019:
7.
Bonds payable
8.
Unamortized amount of discount
9.
Net book value of bonds
1.
Cash inflow at date of issuance
Information for the entire 10-year period:
2.
Principal cash outflow
3.
Total interest cash outflow
4.
Total interest expense
5.
Coupon interest rate
Income statement for the year 2019:
6.
Interest expense for 2019
Balance Sheet at December 31, 2019:
7.
Bonds payable
8.
Unamortized amount of discount
9.
Net book value of bonds
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112) Steamboat Company issued the following ten-year bonds on January 1, 2019: $100,000
maturity value, 6% interest payable annually on each December 31. The bonds were dated
January 1, 2019 and the accounting period ends December 31. The bonds were issued for
$93,000. Steamboat uses the effective-interest method for amortization. The amortization for
2019 was $510.
A.
Determine the following:
1.
Cash inflow at date of issuance
Information for the entire 10-year period:
2.
Principal cash outflow
3.
Total interest cash outflow
4.
Total interest expense
5.
Coupon interest rate
6.
Effective interest rate
Income statement for the year 2019:
7.
Interest expense for 2019
Balance Sheet at December 31, 2019:
8.
Bonds payable
9.
Unamortized amount of discount
10.
Net book value of bonds
B. Assuming instead that the accounting period ends on June 30, prepare the adjusting entry
related to interest expense and the interest accrual at June 30. No adjusting entries have been
made during the year.
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Answer:
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113) On January 1, 2019, Mendez Company issued 400 of its $1,000, ten-year, 9% bonds. The
bonds were dated January 1, 2019, and interest is paid annually each December 31. The bonds
were issued at 99.
Part A: Prepare the entry to record the issuance of the bonds on January 1, 2019:
Part B: Were the bonds issued at par, at a premium, or at a discount? How did you arrive at your
answer?
Answer:
114) Consider the following statement: “Issuing bonds at a discount is bad for the issuing
company.” Discuss the statement and comment on its validity.
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115) On January 1, 2019, Simmons Company issued $100,000 of its ten-year, 6% bonds payable
at $108,000 to yield a market rate of 5%. The bonds were dated January 1, 2019, and interest is
paid semiannually on each June 30 and each December 31. The effective interest method is used
for amortization and no adjusting journal entries were made during the year.
A. Prepare the journal entry for the sale of the bonds.
B. Prepare the journal entry to record the first interest payment and include the appropriate date
before the entry.
C. Prepare the journal entry to record the second interest payment and include the appropriate
date before the entry.
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116) Harriman Company authorized a $1,000,000, 10-year, 6% bond issue dated January 1,
2019, when the market rate was 8%. Annual interest will be paid each December 31. On January
1, 2019, the bonds were issued for $866,000. Harriman Company has a December 31 year-end.
A. Prepare the journal entry to record the sale of the bonds.
B. Prepare the required journal entry on December 31, 2019 to record amortization using the
effective interest method. No adjusting journal entries were made during the year.
C. Was the bond issued at par, at a discount, or at a premium?
D. Will interest expense over the life of the bond be greater than, less than, or equal to the total
cash payment for interest over the life of the bond?
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117) On January 1, 2019, Jaspo, Inc. issued a $1,000, 5%, five-year bond for $1,092 when the
market rate was 3%. The bond was dated on January 1, 2019, and interest is payable each
December 31. Jaspo, Inc. has a December 31 year-end and uses the effective interest method of
amortization. Jaspo does not use a discount or a premium account for bonds in its accounting
records.
A. Prepare the journal entry required on January 1, 2019.
B. Prepare the journal entry required on December 31, 2019. Round the entry items to whole
dollar amounts.
C. Was the bond issued at par, at a premium, or at a discount?
D. What is the carrying value (book value) of the bond at December 31, 2019? Round your
answer to a whole dollar amount.
E. Where in the financial statements does the carrying value of the bond appear? (Be specific).
F. On what date does the bond issue mature?
70
118) Southridge Company prepared a bond issue dated January 1, 2019. On January 1, 2019, the
company issued $100,000 of its par value bonds for $82,700. The bonds mature in thirty years
and have a coupon rate of interest of 3% per year and the market rate at the date of issue is 4%.
Interest is payable annually on December 31 which is also the year-end date for Southridge.
Southridge does not use a discount or a premium account in its records. The effective interest
method of amortization is used. Round the entry items to the nearest whole dollar amounts.
A. Prepare the journal entry to record the sale of bonds on January 1, 2019.
B. Prepare the journal entry to record interest expense at December 31, 2019. No adjusting
journal entries have been made during the year.
C. Show how the bonds would be reported on the balance sheet of Southridge Company at
December 31, 2019.
119) On January 1, 2019, Laramie Company issued $500,000, 4%, five-year bonds payable at
92. The market rate at the date of issue is 6%. Interest is payable semiannually at each June 30
and December 31. Laramie has a December 31 year-end and uses the effective interest method of
amortization.
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2019.
B. Prepare the journal entry to record the first interest payment and interest expense at June 30,
2019. No entries have yet been made for interest on these bonds.
C. Prepare the journal entry to record the second interest payment and interest expense at
December 31, 2019. No entries have been made for these bonds since June 30, 2019.
D. What would the carrying value of the bonds be on December 31, 2019?
72
120) On January 1, 2019, Maralie Company issued $500,000, 4%, ten-year bonds payable at 92.
The market rate at the date of issue is 6%. Interest is payable annually at its year-end on each
December 31. Maralie uses the effective interest method of amortization.
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2019.
B. Prepare the journal entry to record the first interest payment and interest expense at December
31, 2019. No entries have yet been made for interest on these bonds.
C. Prepare the journal entry to record the second interest payment and interest expense at
December 31, 2020. No entries have been made for these bonds since December 31, 2019.
D. What would the carrying value of the bonds be on December 31, 2020?
121) Newton Company issued its $1,000,000, 7%, ten-year bonds to the public on January 1,
2019. The bonds pay interest annually, beginning on December 31, 2019. Newton Company
received $1,154,420 in cash at the issuance of the bonds. The market rate of interest when the
bonds were issued was 5%. Newton Company has a December 31 year-end. Assume that no
adjusting journal entries have been made during the year.
A. Compute the amount of the premium that Newton Company should amortize on December
31, 2019, assuming the effective-interest method is used.
B. Compute the amount of the premium that Newton Company should amortize on December
31, 2019, assuming the straight-line method is used.
C. Which method above is theoretically the better method to use for amortizing a bond premium?
122) Grand Company issued $150,000 of 5-year bonds on January 1, 2019 with a coupon interest
rate of 14%, payable annually each December 31. On January 1, 2019, the market interest rate
was 12%. Assume effective-interest amortization. (The present value factor for $1 at 6% for 10
periods is 0.55839, for $1 at 7% for 10 periods is 0.50835, for $1 at 14% for 5 periods is
0.51937, and for $1 at 12% for 5 periods is 0.56743. The present value of an annuity of $1 for 10
periods at 6% is 7.36009, for 10 periods at 7% is 7.02358, for 5 periods at 6% is 4.21236, for 5
periods at 7% is 4.10020, and for 5 periods at 12% is 3.60478). Round your final answers to the
nearest next whole dollar amount.
A. Calculate the issue price (total amount received) at January 1, 2019.
B. What would be the amount of premium amortization for December 31, 2019? No adjusting
journal entries have been made during the year.
C. What would be the amount of the interest payment on December 31, 2019?
D. What is the book value of the bonds at December 31, 2019?
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123) On March 31, 2019, Topper Corp. retired bonds early by repurchasing them in the market
for $9,700,000. The total face value of the bonds retired at March 31, 2019 was $10 million for
which there remained a balance of $450,000 of unamortized discount.
Prepare the journal entry to retire the bonds.
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124) TreeTop Company had issued $5,000,000 of 10-year bonds with a 6% coupon rate and
interest to be paid annually. They were issued on January 1, 2013 at 96 and have been amortized
using the effective interest method through December 31, 2019 at which time the balance in the
bond discount was $130,000. The effective interest rate was 7%. On June 30, 2020, TreeTop
retired all the bonds by exercising the call feature. The call price was 101.
Prepare the journal entry for the call of the bonds on June 30, 2020. (Remember to amortize the
discount and update the book value of the bonds for the half-year prior to retirement).
77
125) Fence Company reported the following information for 2019 (in millions).
Identify the activities section where these items would be reported on the statement of cash flows
(operating, investing, or financing). Also, indicate whether each amount would be added (+) or
subtracted (—) in those sections of the statement of cash flows.
Interest payments
$585
Proceeds from the issuance of bonds
$3,833
Borrowings under a revolving line of
credit
$462
Bond retirements
$2,794
Interest payments
Operating
Proceeds from the issuance
of bonds
Financing
+ $3,833
Borrowings under a
revolving line of credit
Financing
+ $462
Bond retirements
Financing
78
126) In a recent year, Tommy Toys reported the following amounts (in millions). Identify the
activities section of the statement of cash flows where these items would be reported. Also,
indicate whether each amount would be added (+) or subtracted (—) in those sections of the cash
flow statement.
Interest payments
$128
Short-term borrowings, net
$419
Long-term borrowings
$147
Repayment of long-term debt
$45
Interest payments
Short-term borrowings, net
Long-term borrowings
debt
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127) Rock Company issued a $1,000,000 bond on January 1, 2019. The bond was dated January
1, 2019, had an 8% coupon rate, pays interest annually on December 31, and sold for $924,184 at
a time when the market rate of interest was 10%. Rock uses the effective-interest method to
account for its bonds.
Prepare the necessary journal entry for each of the following dates (assuming that no adjusting
journal entries have been made during the year):
(a) January 1, 2019
(b) December 31, 2019
(c) December 31, 2020
Round the entry items to the nearest whole dollar amounts.
80
128) Stone Company issued a $1,000,000, 5-year bond on January 1, 2019. The bond was dated
January 1, 2019 with an 8% coupon rate, paying interest annually on December 31, and was
issued for $1,084,250 at a time when the market rate of interest was 6%. Stone uses the effective-
interest method to account for its bonds.
Prepare the necessary journal entry for each of the following dates (round your answers to the
nearest whole dollar amount):
(a) January 1, 2019
(b) December 31, 2019
(c) December 31, 2020