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224) Holly Springs, Inc. contracted with Coldwater Corporation to have constructed a custom-
made lathe. The machine was completed and ready for use on January 1, 2018. Holly Springs
paid for the lathe by issuing a $300,000 note due in three years. Interest, specified at 2%, was
payable annually on December 31 of each year. The cash market price of the lathe was unknown.
It was determined by comparison with similar transactions for which 6% was a reasonable rate of
interest.
Required:
(1.) Prepare the journal entry on January 1, 2018, for Holly Springs’ purchase of the lathe.
(2.) Prepare an amortization schedule for the three-year term of the note.
(3.) Prepare the journal entries to record (a) interest for each of the three years and (b) payment
of the note at maturity.
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225) Holly Springs, Inc. contracted with Coldwater Corporation to have constructed a custom-
made lathe. The machine was completed and ready for use on January 1, 2018. Holly Springs
paid for the lathe by issuing a $300,000 note due in three years. Interest, specified at 2%, was
payable annually on December 31 of each year. The cash market price of the lathe was unknown.
It was determined by comparison with similar transactions for which 6% was a reasonable rate of
interest.
Required:
(1.) Prepare the journal entry on January 1, 2018, for Coldwater Corporation’s sale of the
lathe.
(2.) Prepare an amortization schedule for the three-year term of the note.
(3.) Prepare the journal entries to record (a) interest for each of the three years and (b) receipt
of payment of the note at maturity.
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226) Pockets lent $20,000 to Lego Construction on January 1, 2018. Lego signed a three-year,
5% installment note to be paid in three equal payments at the end of each year.
Required:
(1.) Prepare the journal entry on January 1, 2018, for Pockets’ lending the funds.
(2.) Calculate the amount of one installment payment.
(3.) Prepare an amortization schedule for the three-year term of the installment note.
(4.) Prepare Pockets’ journal entry for the first installment payment on December 31, 2018.
(5.) Prepare Pockets’ journal entry for the third installment payment on December 31, 2020.
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227) Little Company borrowed $48,000 from Sockets on January 1, 2018, and signed a three-
year, 6% installment note to be paid in three equal payments at the end of each year. The present
value of an ordinary annuity of $1 for 3 periods at 6% is 2.67301.
Required:
(1.) Prepare the journal entry on January 1, 2018, for Sockets’ lending the funds.
(2.) Calculate the amount of one installment payment.
(3.) Prepare an amortization schedule for the three-year term of the installment note.
(4.) Prepare the journal entry for Sockets’ first installment payment received on December 31, 2018.
(5.) Prepare the journal entry for Sockets’ third installment payment received on December 31, 2020.
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228) DCL Industries purchased a supply of mechanical components from E Corporation on
November 1, 2018. In payment for the $48,000 purchase, DCL issued a one-year installment
note to be paid in equal monthly payments at the end of each month. The payments include
interest at the rate of 12%.
Required:
1. Prepare the journal entry for DCL’s purchase of the components on November 1, 2018.
2. Prepare the journal entry for the first installment payment on November 30, 2018.
3. What is the amount of interest expense that DCL will report in its income statement for the
year ended December 31, 2018?
Use the following to answer the question(s) below:
In its 2018 annual report to shareholders, Health Foods, Inc., disclosed the following information
about some of its indebtedness:
The fair value of convertible subordinated debentures is estimated using quoted market prices.
Book amounts and estimated fair values of our financial instruments other than those for which
book amounts approximate fair values as noted above are as follows (in thousands)
2018
2017
Estimated
Estimated
Fair
Book
Fair
Value
Amount
Value
Convertible subordinated debentures
$295,923
$151,449
$200,396
In addition, the company disclosed the following:
We have outstanding zero coupon convertible subordinated debentures which had a book amount
of approximately $158.8 million and $151.4 million at September 26, 2018, and September 28,
2017, respectively. The debentures have an effective yield to maturity of 5 percent and a
principal amount at maturity on March 2, 2032, of approximately $308.8 million. The debentures
are convertible at the option of the holder, at any time on or prior to maturity, unless previously
redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per
$1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be
redeemed at the option of the holder on March 2, 2022, or March 2, 2027, at the issue price plus
accrued original discount totaling approximately $188 million and $241 million, respectively.
229) Required: Explain why the estimated fair value of the debentures exceeds their book
amount at the end of fiscal year 2018.
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230) Required: Why did the book amount of the debentures increase during fiscal year 2018?
231) Required: What amount of interest expense will Health Foods accrue on the debentures
during fiscal year 2019?
232) Required: Determine the gain or loss that Health Foods would have reported in its 2018
income statement if it had redeemed (and retired) the debentures at fair value at the end of the
fiscal year.
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233) Required: Suppose that half of the bondholders had converted them into Health Foods’
stock at the end of the 2018 fiscal year when the stock price is $90 per share. What gain or loss
from this conversion would Health Foods have recorded on the transaction using the book value
method? The market value method?
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234) On August 1, 2019, United Corporation issued $10 million of 8% convertible bonds at 105.
The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants,
each of which entitled the bondholder to purchase, for $50, one share of United $5 par common
stock. World Company purchased 10% of the bond issue. On August 1, 2019, the market value
per share for United stock was $56 and the market value of each warrant was $6. In March 2025,
when United common stock had a market price of $70 per share and the unamortized premium
balance was $300,000, World exercised the warrants it held.
Required:
1. Prepare the journal entries on August 1, 2019, to record (A) the issuance of the bonds by
United and (B) the investment by World.
2. Prepare the journal entries for both companies in March 2025 to record the exercise of the
warrants.
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235) On January 1, 2017, Slug Corporation issued $6 million of 8%, 10-year convertible bonds
at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible
into 40 shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an
investment. On July 1, 2021, Fuzz converted all of its bonds into common stock of Slug. The
market price per share for Slug was $32 at the time of the conversion. Both companies use the
straight-line method for amortization.
Required:
1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books.
2. Prepare the journal entries for the conversion on the books of the issuer and the investor.
236) The December 31, 2017, balance sheet of Ming Inc. included 12% bonds with a face
amount of $100 million. The bonds were issued in 2005 and had a remaining discount of
$3,400,000 at December 31, 2017. On January 1, 2018, Ming called the bonds at a price of 102.
Required: Prepare the journal entry by Ming to record the retirement of the bonds on January 1,
2018.
237) On January 1, 2018, Whittington Stoves issued $800 million of its 8% bonds for $736
million. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and
December 31. Whittington records interest at the effective rate and elected the option to report
these bonds at their fair value. One million dollars of the increase in fair value was due to a
change in the general (risk-free) rate of interest. On December 31, 2018, the fair value of the
bonds was $752 million as determined by their market value on the NYSE.
Required:
1. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2018 (the second interest
payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the
December 31, 2018, balance sheet.
238) On January 1, 2018, BBX issued $400,000 of its 8% bonds for $368,000. The bonds were
priced to yield 10%. Interest is payable semiannually on June 30 and December 31. BBX records
interest at the effective rate and elected the option to report these bonds at their fair value. On
December 31, 2018, the fair value of the bonds was $370,000 as determined by their market
value on the NYSE. $1,000 of the change in fair value was due to a change in the general (risk-
free) rate of interest.
Required:
1. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2018 (the second interest
payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the
December 31, 2018, balance sheet.
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239) On January 1, 2018, Ouachita Airlines issued $400,000 of its 20-year, 8% bonds. The bonds
were priced to yield 10%. Interest is payable semiannually on June 30 and December 31.
Ouachita Airlines records interest at the effective rate and elected the option to report these
bonds at their fair value. On December 31, 2018, the fair value of the bonds was $335,000 as
determined by their fair value in the over-the-counter market. None of the change in fair value
was due to a change in the general (risk-free) rate of interest.
Required:
1. Determine the price of the bonds at January 1, 2018, and prepare the journal entry to record
their issuance. Show calculations.
2. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment).
Show calculations.
3. Prepare the journal entry to record interest on December 31, 2018 (the second interest
payment). Show calculations.
4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the
December 31, 2018, balance sheet. Show calculations.