Chapter 14 Bonds and Long-Term Notes
141. On January 1, 2016, Cool Universe issued 10% bonds dated January 1, 2016, with a face
amount of $20 million. The bonds mature in 2025 (10 years). For bonds of similar risk and
maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record the bond issuance by Cool on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the straight-line
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the straight-line
method.
Answer:
Chapter 14 Bonds and Long-Term Notes
142. On January 1, 2016, Boomer Universal issued 12% bonds dated January 1, 2016, with a face
amount of $200 million. The bonds mature in 2025 (10 years). For bonds of similar risk and
maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record the bond issuance by Boomer on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the straight-line
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the straight-line
method.
Answer:
Chapter 14 Bonds and Long-Term Notes
143. On January 1, 2016, Club Company purchased 10% bonds, dated January 1, 2016, with a face
amount of $20 million. The bonds mature in 2025 (10 years). For bonds of similar risk and
maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record the bond purchase by Club on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the straight-line
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the straight-line
method.
144. On January 1, 2016, for $18 million, Monument Company purchased 10% bonds, dated
January 1, 2016, with a face amount of $20 million. For bonds of similar risk and maturity, the
market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Prepare the journal entry to record interest on June 30, 2016, using the straight-line
method.
2. Prepare the journal entry to record interest on December 31, 2016, using the straight-line
method.
Answer:
Chapter 14 Bonds and Long-Term Notes
145. On January 1, 2016, for $18 million, Cenotaph Company purchased 10% bonds, dated January
1, 2016, with a face amount of $20 million. For bonds of similar risk and maturity, the market
yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
2. Prepare the journal entry to record interest on December 31, 2016, using the effective
interest method.
Answer:
146. On January 1, 2016, for $18 million, Marker Company issued 10% bonds, dated January 1,
2016, with a face amount of $20 million. For bonds of similar risk and maturity, the market
yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
2. Prepare the journal entry to record interest on December 31, 2016, using the effective
interest method.
Answer:
147. On January 1, 2016, Shark Company sold $800,000 of 10% ten-year bonds. Interest
is payable semiannually on June 30 and December 31. The bonds were sold for
$708,000, priced to yield 12%. Shark records interest at the effective rate.
Required:
Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
148. On July 1, 2016, Flay Foods issued $100 million of its 8%, bonds for $92 million.
The bonds were priced to yield 10%. The bonds are dated July 1, 2016. Interest is
payable semiannually on December 31 and June 30. Flay records interest at the
effective rate. Flay records interest at the effective rate.
Required:
1. Prepare the journal entry to record interest on December 31, 2016 (the first interest
payment).
2. Prepare the journal entry to record interest on June 30, 2017 (the second interest
payment).
Answer:
149. On January 1, 2016, Field Company purchased 12% bonds, dated January 1, 2016, with a face
amount of $20 million. The bonds mature in 2025 (10 years). For bonds of similar risk and
maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record the bond purchase by Field on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the straight-line
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the straight-line
method.
150. On February 1, 2016, Lagune & Sons issued 9% bonds dated February 1, 2016, with a face
amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective
interest rate for these bonds was 10%. Interest is paid semiannually on July 31 and January 31.
Lagune’s fiscal year is the calendar year.
Required:
1. Prepare the journal entry to record the bond issuance on February 1, 2016.
2. Prepare the entry to record interest on July 31, 2016, using the effective interest method.
3. Prepare the necessary journal entry on December 31, 2016.
4. Prepare the necessary journal entry on January 31, 2017.
Answer:
151. On February 1, 2016, Sanford & Son issued 10% bonds dated February 1, 2016, with a face
amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective
interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31.
Sanford & Son’s fiscal year is the calendar year.
Required:
1. Prepare the journal entry to record the bond issuance on February 1, 2016.
2. Prepare the entry to record interest on July 31, 2016, using the straight-line method
3. Prepare the necessary journal entry on December 31, 2016.
4. Prepare the necessary journal entry on January 31, 2017.
152. On February 1, 2016, Fox Corporation issued 9% bonds dated February 1, 2016, with a face
amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective
interest rate for these bonds was 10%. Interest is paid semiannually on July 31 and January 31.
Fox’s fiscal year is the calendar year. Fox uses the straight-line method of amortization.
Required:
1. Prepare the journal entry to record the bond issuance on February 1, 2016.
2. Prepare the entry to record interest on July 31, 2016.
3. Prepare the necessary journal entry on December 31, 2016.
4. Prepare the necessary journal entry on January 31, 2017.
153. On February 1, 2016, Wolf Inc. issued 10% bonds dated February 1, 2016, with a face amount
of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate
for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf’s fiscal
year is the calendar year. Wolf uses the effective interest method of amortization.
Required:
1. Prepare the journal entry to record the bond issuance on February 1, 2016.
2. Prepare the entry to record interest on July 31, 2016.
3. Prepare the necessary journal entry on December 31, 2016.
4. Prepare the necessary journal entry on January 31, 2017.
Answer:
154. Miranda Company contracted with Stewart Corporation to construct custom-made equipment.
The equipment was completed and ready for use on January 1, 2016. Miranda paid for the
machine by issuing a $200,000, three-year note that bears interest at the rate of 4%, payable
annually on December 31 each year. Since the machine was custom-built, the cash price was
unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable
rate of interest.
Required:
1. Prepare the journal entry by Miranda to record the purchase of equipment.
2. Prepare journal entries to record interest for each of the first two years.
Chapter 14 Bonds and Long-Term Notes
155. On January 1, 2016, CPS Co. borrowed $340,000 cash from iLend and issued a five-year, $340,000, 4%
note. Interest was payable annually on December 31.
Required:
Prepare the journal entries for both firms to record interest at December 31, 2016.
Answer:
156. 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, 2016. 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, 2016, 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.
Answer:
Chapter 14 Bonds and Long-Term Notes
157. 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, 2016. 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, 2016, 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.
Answer:
Chapter 14 Bonds and Long-Term Notes
Chapter 14 Bonds and Long-Term Notes
159. Pockets lent $20,000 to Lego Construction on January 1, 2016. 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, 2016, 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, 2016.
(5.) Prepare Pockets’ journal entry for the third installment payment on December 31, 2018.
Answer:
160. Little Company borrowed $48,000 from Sockets on January 1, 2016, 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, 2016, 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, 2016.
(5.) Prepare the journal entry for Sockets’ third installment payment received on December 31, 2018.
Answer:
161. DCL Industries purchased a supply of mechanical components from E Corporation on
November 1, 2016. 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, 2016.
2. Prepare the journal entry for the first installment payment on November 30, 2016.
3. What is the amount of interest expense that DCL will report in its income statement for
the year ended December 31, 2016?
Use the following to answer questions 162–166:
In its 2016 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)
2016
2015
Estimated
Estimated
Book
Fair
Book
Fair
Amount
Value
Amount
Value
Convertible subordinated
debentures
$ 158,791
$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
Chapter 14 Bonds and Long-Term Notes
amount of approximately $158.8 million and $151.4 million at September 26, 2016, and
September 28, 2015, respectively. The debentures have an effective yield to maturity of 5
percent and a principal amount at maturity on March 2, 2030, 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,
2020, or March 2, 2025, at the issue price plus accrued original discount totaling
approximately $188 million and $241 million, respectively.
162. Required: Explain why the estimated fair value of the debentures exceeds their book amount
at the end of fiscal year 2016.
163. Required: Why did the book amount of the debentures increase during fiscal year 2016?
164. Required: What amount of interest expense will Health Foods accrue on the debentures
during fiscal year 2017?