Chapter 14: Q21Q (page 753)
What disclosures are required relative to long-term debt and sinking fund requirements?
Futurepaymentsforsinkingfund requirements and the maturity amounts of long-term debt.
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Question: Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.
Question: (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)
Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of \(330,000 plus \)33,000 of accrued interest. The note is due today, December 31, 2017. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, \(30,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of revised principal will continue to be due on 12/31 each year.
Assume the following present value factors for 3 periods.
Single sum | 0.93543 | 0.93201 | 0.92589 | 0.92521 | 0.92184 | 0.91514 |
Ordinary annuity of 1 | 2.86989 | 2.86295 | 2.85602 | 2.84913 | 2.84226 | 2.82861 |
Instructions
(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately \)363,000 as the present value of the total future cash flows.)
(b) Prepare a schedule of debt reduction and interest expense for the years 2017 through 2020.
(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2017 through 2020.
(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2017, 2018, and 2019.
(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2017, 2018, and 2019.
Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, \(100,000
bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.
Cash Interest Bond Premium Carrying Amount
Date Received Revenue Amortization of Bonds
12/31/15 \(108,660
12/31/16 \)7,000 \(5,433 \)1,567 107,093
12/31/17 7,000 5,354 1,646 105,447
12/31/18 7,000 5,272 1,728 103,719
12/31/19 7,000 5,186 1,814 101,905
12/31/20 7,000 5,095 1,905 100,000
The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.
12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000
Fair value 106,500 107,500 105,650 103,000 100,000
Instructions
(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified
as held-to-maturity securities.
(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.
(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.
(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-
sale.
(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.
(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.
Strickland Company owes \(200,000 plus \)18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2017, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of \(390,000, accumulated depreciation of \)221,000, and a fair value of \(180,000.
Instructions
(Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.
May 1, 2017 Bonds payable with a par value of \(900,000, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)
Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)
Jan. 1, 2018 Interest on the bonds is paid.
April 1 Bonds with par value of \)360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)
Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.
Instructions
(Round to two decimal places.)
Prepare journal entries for the transactions above.
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