Accounting Chapter 14 5 January Year And The second Annual Installment Payment

173. On January 1, a company issued 10%, 10-year bonds payable with a par value of

$720,000. The bonds pay interest each July 1 and January 1. The bonds were sold for

$817,860 cash, which provides the holders an annual yield of 8%. Prepare the issuer’s journal

entry to record the first semiannual interest payment assuming the effective interest method is

used.

174. A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1.

Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at

$2,162,290 to yield the buyers an 8% annual return. The company uses the effective interest

method of amortization.

(1) Prepare an amortization table for the first two semiannual payment periods using the

format shown below.

Semiannual

Cash

Bond

Interest

Premium

Unamortized

Carrying

Period

Paid

Expense

Amortization

Premium

Value

(2) Prepare the journal entry to record the first semiannual interest payment.

175. A company calls $150,000 par value of bonds with a carrying value of $147,950. The

company calls the bonds at $151,000. Prepare the journal entry to record the retirement of the

bonds.

176. A company has 10%, 20-year bonds outstanding with a par value of $500,000. The

company calls the bonds at 96 when the unamortized discount is $24,500. Calculate the gain

or loss on the retirement of these bonds.

177. A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium.

On the current year’s interest date, after the bond interest was paid and after 40% of the total

premium had been amortized, the company purchased the entire bond issue on the open

market at 98 and retired it. Prepare the journal entry to record the retirement of these bonds.

178. On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment

note that is to be repaid with 4 annual year-end payments of $21,607, the first of which is due

on December 31, Year 1.

(a) Prepare the company’s journal entry to record the note’s issuance.

(b) Prepare the journal entries to record the first and second installment payments.

14–79

179. On January 1, a company borrowed $50,000 cash by signing a 7% installment note that

is to be repaid in 5 annual end-of-year payments of $12,195. The first payment is due on

December 31. Prepare the journal entries to record the first and second installment payments.

180. A company purchased two new delivery vans for a total of $250,000 on January 1, Year

1. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining

balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the

first payment on December 31, Year 1. Each payment includes interest on the unpaid balance

plus principal.

(1) Prepare a note amortization table using the format below:

Period

Debit

Ending

Beginning

Interest

Notes

Credit

Ending

Date

Balance

Expense

Payable

Cash

Balance

12/31/Yr 1

12/31/Yr 2

12/31/Yr 3

(2) Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the

second annual installment payment on December 31, Year 2.

Fill in the Blank Questions

181. _______________ bonds have specific assets of the issuing company pledged as

collateral.

182. ______________ bonds are bonds that are scheduled for maturity on one specified date.

183. _______________ bonds are bonds that mature at more than one date, often in a series,

and thus are usually repaid over a number of periods.

184. ____________________ bonds reduce a bondholder’s risk by requiring the issuer to

create a fund of assets set aside as specified amounts and dates to repay the bonds at maturity.

185. Bonds payable to whoever holds them are called _________________ bonds.

186. _____________________ bonds can be exchanged for a fixed number of shares of the

issuing corporation’s common stock.

187. ___________________ bonds have an option exercisable by the issuer to retire them at a

stated dollar amount prior to maturity.

14–83

188. The legal document identifying the rights and obligations of both the bondholders and

the issuer is called the ____________________________________.

189. An ________________________________ is an obligation requiring a series of

payments to the lender.

190. When applying equal total payments to a note, with each payment the amount applied to

the note principal ____________ while the interest expense for the note _____________.

191. The ____________ concept is the idea that cash paid (or received) in the future has less

value than the same amount of cash paid (or received) today.

192. An _______________ is a series of equal payments at equal time intervals.

193. A _______________________ is a contractual agreement between an employer and its

employees for the employer to provide benefits (payments) to employees after they retire.

194. _________________________ leases are short-term or cancelable leases in which the

lessor retains the risks and rewards of ownership.

195. ____________________ leases are long-term or noncancelable leases by which the

lessor transfers substantially all risks and rewards of ownership to the lessee.

196. Return on equity _______________ when the expected rate of return from the acquired

assets is greater than the rate of interest on the bonds used to finance the asset acquisition.

197. Bonds issued in the names and addresses of their holders are ________________ bonds.

198. The ______________ ratio is used to assess the risk of a company’s financing structure.

199. The rate of interest that borrowers are willing to pay and lenders are willing to accept for

a particular bond and its risk level is the ____________________ of interest.

200. The _________________________ method of amortizing a bond discount allocates an

equal portion of the total bond interest expense to each interest period.