14 Long-Term Liabilities EXERCISES 14.1
EXERCISES
E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.
(a) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year.
(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)
(c) Serial bonds payable, $1,000,000, of which $200,000 are due each July 31.
(d) Amounts withheld from employees’ wages for income taxes.
(e) Notes payable due January 15, 2020.
(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.
(g) Bonds payable of $2,000,000 maturing June 30, 2018.
(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)
(i) Deposits made by customers who have ordered goods.
Instructions
Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.
E14-2 (L01) (Classification) The following items are found in the financial statements.
(a) Discount on bonds payable.
(b) Interest expense (credit balance).
(c) Unamortized bond issue costs.
(d) Gain on repurchase of debt.
(e) Mortgage payable (payable in equal amounts over next 3 years).
(f) Debenture bonds payable (maturing in 5 years).
(g) Notes payable (due in 4 years).
(h) Premium on bonds payable.
(i) Bonds payable (due in 3 years).
Instructions
Indicate how each of these items should be classified in the financial statements.
E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.
1. On January 1, 2017, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1.
2. On June 1, 2017, Garfunkel Company issued $100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.
Instructions
For each of these two independent situations, prepare journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest on July 1.
(c) The accrual of interest on December 31.
E14-4 (L01) EXCEL (Entries for Bond Transactions—Straight-Line) Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line method of amortization for bond premium or discount.
Instructions
Prepare the journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and the related amortization on July 1, 2017.
(c) The accrual of interest and the related amortization on December 31, 2017.
E14-5 (L01) EXCEL (Entries for Bond Transactions—Effective-Interest) Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.
Instructions
Prepare the journal entries to record the following. (Round to the nearest dollar.)
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2017.
(c) The accrual of interest and the related amortization on December 31, 2017.
E14-6 (L01) (Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)
E14-7 (L01) (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.)
E14-8 (L01) GROUPWORK (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 effectiveinterest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017.
E14-9 (L01) GROUPWORK (Entries and Questions for Bond Transactions) On June 30, 2017, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and -December 31.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on June 30, 2017.
(2) The payment of interest and the amortization of the premium on December 31, 2017.
(3) The payment of interest and the amortization of the premium on June 30, 2018.
(4) The payment of interest and the amortization of the premium on December 31, 2018.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet.
(c) Provide the answers to the following questions.
(1) What amount of interest expense is reported for 2018?
(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?
E14-10 (L01) (Entries for Bond Transactions) On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for 2017–2019.
(c) Prepare the journal entry to record the interest payment and the amortization for 2017.
(d) Prepare the journal entry to record the interest payment and the amortization for 2019.
E14-11 (L01) (Information Related to Various Bond Issues) Karen Austin Inc. has issued three types of debt on January 1, 2017, the start of the company’s fiscal year.
(a) $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
(b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
(c) $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.
Instructions
Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.
E14-12 (L01,2) (Entry for Redemption of Bond) On January 2, 2012, Banno Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”)
The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Banno called $900,000 face amount of the bonds and redeemed them.
Instructions
Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.
(AICPA adapted)
E14-13 (L01,2) (Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding $6,000,000 of 11% bonds
(interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of 10%, 15-year bonds (interest payable
July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.
Instructions
Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.
E14-14 (L01,2) (Entries for Redemption and Issuance of Bonds) On June 30, 2009, County Company issued 12% bonds with a par value of $800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017.
Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of $1,000,000 at 102; they mature in 20 years.
County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.
Instructions
(a) Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
(b) Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.
E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of $300,000. On April 30, 2017, when these bonds had an unamortized discount of $10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).
Instructions
Ignoring interest, compute the gain or loss and record this refunding transaction.
(AICPA adapted)
E14-16 (L03) (Entries for Zero-Interest-Bearing Notes) On January 1, 2017, Ellen Carter Company makes the two following acquisitions.
1. Purchases land having a fair value of $200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $337,012.
2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).
The company has to pay 11% interest for funds from its bank.
Instructions
(Round answers to the nearest cent.)
(a) Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
(b) Record the interest at the end of the first year on both notes using the effective-interest method.
