Chapter 14: Q15Q (page 753)
How is the present value of a non-interest-bearing note computed?
The present value of the non-interest-bearing note is calculated using the following formula:
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
(Amortization Schedule—Effective-Interest) Assume the same information as E14-6.
Instructions
Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)
(Issuance and Redemption of Bonds; Income Statement Presentation) Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of \(3,000,000 on January 2, 2003, at a discount of \)150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.
On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.
Instructions
(a) Prepare journal entries to record the issuance of the 11% bonds and the redemption of the 9% bonds.
(b) Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.
(Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey arena at a cost of \(2,500,000. It received a downpayment of \)500,000 from local businesses to support the project, and now needs to borrow \(2,000,000 to complete the project. It therefore decides to issue \)2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.
(b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method.
(c) Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.
Determine Proper Amounts in Account Balances) Presented below are two independent situations.
(a) George Gershwin Co. sold \(2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Gershwin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017.
(b) Ron Kenoly Inc. issued \)600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017.
(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.
Instructions
(a) What is the accounting nature of this transaction?
(b) Prepare the journal entry to record this refinancing:
(1) On the books of Perkins Inc.
(2) On the books of United Bank.
(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
