119.
On January 1, 2016, 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 semi-annually at each June 30
and December 31. Laramie has a December 31 year-end and uses the effective interest
method of amortization.
Required:
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2016.
B. Prepare the journal entry to record the first interest payment and interest expense at June
30, 2016. 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, 2016. No entries have been made for these bonds since June 30, 2016.
D. What would the carrying value of the bonds be on December 31, 2016?
A.
120.
On January 1, 2016, 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. Laramie uses the effective interest method of amortization.
Required:
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2016.
B. Prepare the journal entry to record the first interest payment and interest expense at
December 31, 2016. 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, 2017. No entries have been made for these bonds since December 31, 2016.
D. What would the carrying value of the bonds be on December 31, 2017?
121.
Newton Company issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2016.
The bonds pay interest annually, beginning on December 31, 2016. 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.
Required:
A. Compute the amount of the premium that Newton Company should amortize on December
31, 2016, assuming the effective-interest method is used.
B. Compute the amount of the premium that Newton Company should amortize on December
31, 2016, 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 authorized $150,000 of 5-year bonds dated January 1, 2017. The coupon rate
of interest was 14%, payable annually each December 31. The bonds were issued on January
1, 2015, when 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.
Required:
A. Calculate the issue price (total amount received) at January 1, 2017.
B. What would be the amount of premium amortization for December 31, 2017? No adjusting
journal entries have been made during the year.
C. What would be the amount of the interest payment on December 31, 2017?
D. What is the book value of the bonds at December 31, 2017?
123.
On March 31, 2017 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, 2017 was $10 million for
which there remained a balance of $450,000 of unamortized discount.
Required:
Prepare the journal entry to retire the bonds.
Bonds payable
10,000,000
Loss on early retirement of
bonds
150,000
Bond discount
450,000
Cash
9,700,000
Feedback:
Face Value
Book Value
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, 2010 at 96 and have been amortized using
the effective interest method through December 31, 2016 at which time the balance in the
bond discount was $130,000. The effective interest rate was 7%. On June 30, 2017, TreeTop
retired all the bonds by exercising the call feature. The call price was 101.
Required:
Prepare the journal entry for the call of the bonds on June 30, 2017. (Remember to amortize
the discount and update the book value of the bonds for the half-year prior to retirement).
Bonds payable
5,000,000
Loss on bond call
159,550
Bond discount
109,550
Cash
5,050,000
Feedback:
Face value of bonds
Bond discount
Book value of bonds
125.
Fence Company reported the following information for 2017 (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 notes
$3,833
Borrowings under a revolving line of credit
$462
Bond retirements
$2,794
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
127.
Rock Company issued a $1,000,000 bond on January 1, 2016. The bond was dated January 1,
2016, 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.
Required:
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, 2016
(b) December 31, 2016
(c) December 31, 2017
Round the entry items to the nearest whole dollar amounts.
128.
Stone Company issued a $1,000,000, 5-year bond on January 1, 2016. The bond was dated
January 1, 2016 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.
Required:
Prepare the necessary journal entry for each of the following dates (round your answers to
the nearest whole dollar amount):
(a) January 1, 2016
(b) December 31, 2016
(c) December 31, 2017