CHAPTER 14
SOLUTIONS TO B EXERCISES
E14-1B (15–20 minutes)
(a) Long-term liability as amount is due more than 1 year out.
(b) Valuation account relating to the long-term liability, bonds payable
(sometimes referred to as a contra account). The $8,500 would continue
to be reported as long-term.
E14-2B (15–20 minutes)
(a) Debenture bonds—Classify as long-term liability on balance sheet.
E14-2B (Continued)
(d) Treasury bonds—Classify as contra account to bonds payable on
balance sheet.
(h) Mortgage payable—Classify one–third as current liability and the remainder as
long-term liability on balance sheet.
E14-3B (15–20 minutes)
1.
Delgado Company:
(a)
1/1/14
Cash ……………………………………………………….
500,000
Bonds Payable …………………………..
500,000
(b)
7/1/14
Bond Interest Expense
($500,000 X 8% X 3/12) …………………………..
Cash ……………………………………………………….
(c)
12/31/14
Bond Interest Expense …………………………..
Interest Payable …………………………..
E14-3B (Continued)
2.
Kumiko Company:
(a)
6/1/14
Cash ……………………………………………………….
Bonds Payable …………………………..
200,000
Bond Interest Expense
($200,000 X 10% X 5/12) …………………………..
8,333
(b)
7/1/14
Bond Interest Expense …………………………..
Cash ($200,000 X 10% X 6/12) …………………………..
(c)
12/31/14
Bond Interest Expense …………………………..
Interest Payable …………………………..
Note: Some students may credit Interest Payable on 6/1/14. In that case,
the entry on 7/1/14 will have a debit to Interest Payable for $8,333 and a
debit to Bond Interest Expense for $1,667.
E14-4B (15–20 minutes)
(a)
1/1/14
Cash ($400,000 X 102%) …………………………..
408,000
Bonds Payable ……………………………………………….
400,000
Premium on Bonds
Payable ……………………………………………………….
8,000
(b)
7/1/14
Bond Interest Expense …………………………..
Premium on Bonds Payable
($8,000 ÷ 40) …………………………..…………………………..
Cash ($400,000 X 8% X 6/12) …………………………..
(c)
12/31/14
Bond Interest Expense …………………………..
Premium on Bonds Payable …………………………..
Interest Payable …………………………..
E14-5B (15–20 minutes)
(a)
1/1/14
Cash …………………………..…………………………..
492,460*
Bonds Payable ……………………………………………….
400,000
Premium on Bonds Payable …………………………..
92,460
(b)
7/1/14
Bond Interest Expense
($492,460 X 6% X 1/2) …………………………..
Premium on Bonds Payable …………………………..
Cash ($400,000 X 8% X 1/2) …………………………..
16,000
(c)
12/31/14
Bond Interest Expense
($491,234 X 6% X 1/2) …………………………..
14,737
Premium on Bonds Payable …………………………..
1,263
Interest Payable …………………………..
16,000
Carrying amount of bonds at July 1, 2014:
Carrying amount of bonds at January 1, 2014 ..
$492,460
Amortization of bond premium
($16,000 – $14,774) …………………………..………..
E14-6B (15–20 minutes)
Schedule of Premium Amortization
Straight-Line Method
Year
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount of
Bonds
Jan. 1, 2014
$5,421,236
Dec. 31, 2014
$400,000
$315,753
84,247*
5,336,989
Dec. 31, 2015
400,000
5,252,742
Dec. 31, 2016
400,000
5,168,495
Dec. 31, 2017
400,000
5,084,248
84,248
E14-7B (15–20 minutes)
The effective-interest or yield rate is 6%. It is determined through trial and
error using Table 6-2 for the discounted value of the principal ($3,736,291) and
Schedule of Premium Amortization
Effective-Interest Method (12%)
Year
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount of
Bonds
(1)
(2)
(3)
(4)
Jan. 1, 2014
$5,421,236
Dec. 31, 2014
$400,000
$325,274
*
$74,726
5,346,510
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2017
400,000
5,094,339
Dec. 31, 2018
E14-8B (15–20 minutes)
(a)
Printing and engraving costs of bonds ……………………….
$ 40,000
Legal fees …………………………………………………………………
120,000
Commissions paid to underwriter ………………………………
Amount to be reported as Unamortized Bond Issue
E14-8B (Continued)
(b)
Interest paid for the period from January 1
(July 1) to June 30 (December 31), 2014;
$5,000,000 X 6% X 6/12………………………………………………..
$150,000
Less: Premium amortization for the period from
January 1 (July 1) to June 30 (December 31), 2014
[($5,000,000 X 1.04) – $5,000,000] ÷ 10 X 6/12 ………..
10,000
Interest expense to be recorded on July 1
(c)
Carrying amount of bonds on June 30, 2014 …………………..
$885,296
Effective interest rate for the period from June 30
to October 31, 2014 (.12 X 4/12) ……………………………………
E14-9B (20–30 minutes)
(a)
1.
July 1, 2014
Cash ……………………………………………………….
1,770,602.00
Discount on Bonds Payable …………………………..
229,398.00
Bonds Payable …………………………..
2,000,000.00
2.
December 31, 2014
Interest Expense
($1,770,602.00 X 12% X 6/12) …………………………..
Discount on Bonds Payable …………………………..
Cash ($2,000,000 X 10% X 6/12) …………………………
3.
Interest Expense
[($1,770,602.00 + $6,236.12)
X 12% X 6/12] ……………………………………………………..
106,610.29
Discount on Bonds Payable …………………………..
Cash …………………………..…………………………..
E14-9B (Continued)
4.
December 31, 2015
Interest Expense
[($1,770,602.00 + $6,236.12 +
$6,610.29) X 12% X 6/12] …………………………..
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
100,000.00
(b)
Long-term Liabilities:
Bonds payable, 10% (due on June 30, 2024) ……………..
$2,000,000.00
Discount on Bonds Payable* ……………………………………
209,544.69
(c)
1.
Interest expense for the period from
January 1 to June 30, 2015 from (a) 3. ……………………
$106,610.69
Interest expense for the period from
July 1 to December 31, 2015 from (a) 4. ………………….
Amount of bond interest expense
2.
the bond interest expense under the effective-interest method.
The amount of bond interest expense reported in 2015 will be less
than the amount that would be reported if the straight-line method
E14-9B (Continued)
3.
Total interest to be paid for the bond
($2,000,000 X 10% X 10) …………………………..
$2,000,000
Plus: Discount ……………………………………………………….
Total cost of borrowing over the life
4.
They will be the same.
E14-10B (15–20 minutes)
(a)
January 1, 2014
Cash ……………………………………………………….
1,075,814.74
Premium on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
1,000,000.00
(b) Schedule of Interest Expense and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Date
Credit Cash
Debit Interest
Expense
Debit
Bond
Premium
Carrying
Value of
Bonds
1/1/14
—
—
—
$1,075,814.74
12/31/14
12/31/16
(c)
December 31, 2014
Bond Interest Expense …………………………..
107,581.47
Premium on Bonds Payable …………………………..
12,418.53
Cash ……………………………………………………….
120,000.00
(d)
December 31, 2016
Bond Interest Expense …………………………..
Premium on Bonds Payable …………………………..
15,026.42
Cash ……………………………………………………….
120,000.00
E14-11B (20–30 minutes)
Secured
Bonds
Zero-Coupon
Bonds
Mortgage
Bonds
1.
Maturity value
$5,000,000
$8,000,000
$10,000,000
2.
Number of interest
20
20
40
periods
3.
Stated rate per period
8%
4.
Effective rate per period
5.
Payment amount per period
6.
Present value
(a)$5,000,000 X 8% = $400,000
$ 4,148,600
(d)Present value of $8,000,000 discounted
at 12% for 20 periods
($8,000,000 X 0.10367) = …………………………………………..
$ 829,360
(e)Present value of an annuity of $500,000 discounted
$11,979,285
E14-12B (15–20 minutes)
Reacquisition price ($2,500,000 X 105%) …………………..
$2,625,000
Less: Net carrying amount of bonds redeemed:
Par value ………………………………………………………
Unamortized premium ……………………………………
Unamortized bond issue costs ……………………….
Calculation of unamortized premium—
Original amount of premium:
$2,500,000 X 2% = $50,000
$50,000/10 = $5,000 amortization per year
Amount of discount unamortized:
$5,000 X 8 = $40,000
Calculation of unamortized issue costs—
Original amount of costs:
$81,000 X $2,500,000/$5,000,000 = $40,500
$40,500/10 = $4,050 amortization per year
Amount of costs unamortized:
$4,050 X 8 = $32,400
January 2, 2014
Bonds Payable ……………………………………………………….
2,500,000
Loss on Redemption of Bonds …………………………..
117,400
Premium on Bonds Payable …………………………………….
Unamortized Bond Issue Costs ………………
Cash ……………………………………………………….
E14-13B (15–20 minutes)
Cash ……………………………………………………………………….
11,760,000
Discount on Bonds Payable (.02 X $12,000,000) ……………
240,000
Bonds Payable ………………………………………………..
12,000,000
(To record issuance of 10% bonds)
Bonds Payable ……………………………………………………….
8,000,000
Loss on Redemption of Bonds …………………………..
Cash ($8,000,000 X 1.06) …………………………..
Discount on Bonds Payable …………………………..
Unamortized Bond Issue Costs ………………………..
(To record retirement of 12% bonds)
Reacquisition price ………………………………………………….
$8,480,000
Less: Net carrying amount of bonds redeemed:
Par value……………………………………………………….
$8,000,000
Unamortized bond discount …………………………..
Unamortized bond issue costs …………………………
E14-14B (12–16 minutes)
(a)
June 30, 2015
Bonds Payable ……………………………………………………….
1,000,000
Loss on Redemption of Bonds …………………………..
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
1,020,000
Reacquisition price ($1,000,000 X 102%) …………………..
$1,020,000
Net carrying amount of bonds redeemed:
Par value …………………………..…………………………..
Unamortized discount …………………………..
(13,000)
(987,000)
(0.02 X $1,000,000 X 13/20)
Cash ($1,100,000 X 101%) …………………………..
Premium on Bonds Payable …………………………..
E14-14B (Continued)
(b)
December 31, 2015
Interest Expense …………………………………………………….
32,725
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
*(1/40 X $11,000 = $275)
**(0.03 X $1,100,000 = $33,000)
E14-15B (10–15 minutes)
Reacquisition price ($1,500,000 X 103%) …………………..
$1,545,000
Less: Net carrying amount of bonds redeemed:
Par value ………………………………………………………
$1,500,000
Unamortized premium …………………………………..
Bonds Payable ……………………………………………………….
Loss on Redemption of Bonds …………………………..
Premium on Bonds Payable …………………………………….
(To record redemption of bonds
payable)
Cash …………………………..………………………………………….
Unamortized Bond Issue Costs …………………………..
Discount on Bonds Payable …………………………………….
(To record issuance of new bonds)
E14-16B (15–20 minutes)
(a)
1.
January 1, 2014
Land ……………………………………………………….
800,000.00
Discount on Notes Payable …………………………..
375,464.00
Notes Payable …………………………..
(The $800,000 capitalized land
cost represents the present
value of the note discounted
for 5 years at 8%)
2.
Equipment ……………………………………………………….
269,547.46
Discount on Notes Payable …………………………..
80,452.54*
Notes Payable …………………………..
350,000.00
*Computation of the discount on
notes payable:
Maturity value …………………………..
Present value of $350,000 due in
8 years at 8%—$350,000
X .54027 ……………………………………………………….
Present value of $14,000
payable annually for 8 years
at 8% annually—$14,000
X 5.74664 ……………………………………………………..
Present value of the note …………………………..
(b)
1.
Interest Expense ……………………………………………………..
64,000.00
Discount on Notes Payable …………………………..
64,000.00
($800,000 X .08)
2.
Interest Expense ……………………………………………………..
21,563.80
($269,547.46 X .08)
Discount on Notes Payable …………………………..
Cash ($350,000 X .04) …………………………..
14,000.00