P12-31A
Requirement 2, cont.
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2016
$ 150,000
01/01/2017
$ 150,000
$ 4,625
1,375
$ 6,000
145,375
02/01/2017
145,375
4,667
1,333
6,000
140,708
P12-32A Analyzing, journalizing, and reporting bond transactions
Learning Objectives 2, 3
2. Discount CR $4,500
Bob’s Hamburgers issued 8%, 10-year bonds payable at 70 on December 31, 2016. At December 31,
2018, Billy reported the bonds payable as follows:
Requirements
1. Answer the following questions about Bob’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2018?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2018, semiannual interest payment and amortization of discount.
SOLUTION
Requirement 1
a.
$300,000
$228,000
semiannual cash payment
$9,000 per year plus $24,000 = $33,000 interest expense per year
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Jun. 30
Interest Expense ($12,000 + $4,500)
16,500
P12-33A Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
3. June 30, 2016, Interest Expense DR $16,400
Requirements
1. If the market interest rate is 6% when TCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
2. If the market interest rate is 9% when TCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
3. The issue price of the bonds is 96. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2016.
SOLUTION
Requirement 1
Requirement 2
The 8% bonds will be issued at a discount if the market interest rate is 9%. They are unattractive in this
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash ($400,000 × 0.96)
384,000
Discount on Bonds Payable ($400,000 − $384,000)
16,000
Bonds Payable
400,000
Jun. 30
Interest Expense ($16,000 + $400)
16,400
Dec. 31
Interest Expense ($16,000 + $400)
16,400
2035
Dec. 31
Bonds Payable
400,000
400,000
P12-34A Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
June 30, 2016, Interest Expense DR $20,400
On January 1, 2016, Agricultural Credit Union (ACU) issued 7%, 20-year bonds payable with face value
of $600,000. These bonds pay interest on June 30 and December 31. The issue price of the bonds is 104.
Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2016.
b. Payment of interest and amortization on June 30, 2016.
c. Payment of interest and amortization on December 31, 2016.
d. Retirement of the bond at maturity on December 31, 2035.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash ($600,000 × 1.04)
624,000
Premium on Bonds Payable ($624,000 −
$600,000)
24,000
Jun. 30
Interest Expense ($21,000 − $600)
Premium on Bonds Payable ($24,000 × 1/40)
Cash ($600,000 × 0.07 × 6/12)
21,000
Dec. 31
Interest Expense ($21,000 − $600)
Premium on Bonds Payable ($24,000 × 1/40)
Cash ($600,000 × 0.07 × 6/12)
21,000
2035
Dec. 31
Bonds Payable
600,000
Cash
P12-35A Reporting liabilities on the balance sheet and computing debt to equity ratio
Learning Objectives 5, 6
1. Total Liabilities $276,900
The accounting records of Router Wireless include the following as of December 31, 2016:
Requirements
1. Report these liabilities on the Router Wireless balance sheet, including headings and totals for
current liabilities and long-term liabilities.
2. Compute Router Wireless’s debt to equity ratio at December 31, 2016.
SOLUTION
Requirement 1
ROUTER WIRELESS
Balance Sheet (Partial)
December 31, 2016
21,000
25,000
75,000
76,000
Requirement 2
Debt to equity ratio
=
Total liabilities
/
Total equity
=
/
P12AB-36A Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2016, Cash DR $529,170
Ben Norton issued $500,000 of 9%, 8-year bonds payable on January 1, 2016. The market interest rate
at the date of issuance was 8%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round all numbers
to the nearest whole dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round all numbers to the nearest whole dollar.)
3. Journalize the issuance of the bonds on January 1, 2016, and payment of the first semiannual interest
amount and amortization of the bond on June 30, 2016. Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
=
Present value of stated interest:
Present value
=
×
=
=
=
Present value of bonds payable:
Present value
=
=
=
PV factor for
i = 4% (8% / 2),
P12AB-36A, cont.
Requirement 2
Cash Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
×
$22,500
×
$21,167
$21,113
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash
529,170
Premium on Bonds Payable ($529,170 − $500,000)
29,170
Bonds Payable
500,000
Jun. 30
Interest Expense ($22,500 − $1,333)
Premium on Bonds Payable
Cash
22,500
P12AB-37A Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2016, Cash DR $557,025
Serenity, Inc. is authorized to issue 5%, 10-year bonds payable. On January 1, 2016, when the market
interest rate is 8%, the company issues $700,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round all numbers
to the nearest whole dollar.)
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
=
Present value of stated interest:
=
=
=
Present value of bonds payable:
Present value
=
=
=
PV factor for
i = 4% (8% / 2),
Requirement 2
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
01/01/2016
$ 557,025
06/30/2016
12/31/2016
=
Face value
×
×
=
×
=
×
=
×
P12AB-37A, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash
557,025
$557,025)
Jun. 30
Interest Expense ($17,500 + $4,781)
Discount on Bonds Payable
Cash
Problems (Group B)
P12-38B Journalizing liability transactions and reporting them on the balance sheet
Learning Objectives 1, 5
1. Jan. 1, 2017, Interest Payable DR $3,000
2. Total Liabilities $853,895
The following transactions of Emergency Pharmacies occurred during 2016 and 2017:
Requirements
1. Journalize the transactions in the Emergency Pharmacies general journal. Round all answers to the
nearest dollar. Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Emergency Pharmacies on March 1, 2017 after
all the journal entries are recorded.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Mar. 1
Cash
330,000
Notes Payable
330,000
Dec. 1
Cash
600,000
Mortgages Payable
600,000
Dec. 31
Interest Expense ($600,000 × 0.06 × 1/12)
Interest Payable
Dec. 31
Interest Expense ($330,000 × 0.13 × 10/12)
Interest Payable
2017
Interest Payable
Jan. 1
Mortgages Payable ($10,000 − $7,000)
Cash
Feb. 1
Interest Expense
Mortgages Payable ($10,000 − $2,965)
Cash
Mar. 1
Interest Expense
Mortgages Payable ($10,000 − $2,930)
Cash
Mar. 1
Interest Payable
Interest Expense($330,000 × 0.13 × 2/12)
Notes Payable
Cash
P12-38B, cont.
Requirement 1, cont.
Sawyer Bank Interest Calculations
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2014
$ 600,000
01/01/2015
$ 600,000
$ 10,000
02/01/2015
03/01/2015
=
×
=
×
=
×
=
×
Requirement 2
EMERGENCY PHARMACIES
Balance Sheet (Partial)
March 1, 2017
Liabilities
Current Liabilities
Current Portion of Notes Payable
$ 55,000
Notes Payable
Total Long-term Liabilities
P12-38B, cont.
Requirement 2, cont.
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2016
$ 600,000
01/01/2017
$ 600,000
$7,000
3,000
$ 10,000
593,000
02/01/2017
593,000
2,965
585,965
P12-39B Analyzing, journalizing, and reporting bond transactions
Learning Objectives 2, 3
2. Discount CR $2,000
George’s Hamburgers issued 8%, 10-year bonds payable at 80 on December 31, 2016. At December 31,
2018, George reported the bonds payable as follows:
Requirements
1. Answer the following questions about George’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2018?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2018, semiannual interest payment and amortization of discount.