14 Long-Term Liabilities PROBLEMS 14
PROBLEMS
P14-1 (L01) GROUPWORK (Analysis of Amortization Schedule and Interest Entries) The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2011, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements are prepared once yearly.
Instructions
(a) Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.
(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.
(c) Determine the stated interest rate and the effective-interest rate.
(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.
(e) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid January 1.)
(f) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.
P14-2 (L01,2) EXCEL (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.
P14-3 (L01,3) (Negative Amortization) Good-Deal Inc. developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal offered a low downpayment and low car payments for the first year after purchase. It believes that this promotion will bring in some new buyers.
On January 1, 2017, a customer purchased a new $33,000 automobile, making a downpayment of $1,000. The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Good-Deal required a $400 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2018. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as of January 1, 2020.
Instructions
(a) Prepare a note amortization schedule for the first year.
(b) Indicate the amount the customer owes on the contract at the end of the first year.
(c) Compute the amount of the new quarterly payments.
(d) Prepare a note amortization schedule for these new payments for the next 2 years.
(e) What do you think of the new sales promotion used by Good-Deal?
P14-4 (L01,2,5) (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.
P14-5 (L01,2) EXCEL (Comprehensive Bond Problem) In each of the following independent cases, the company closes its books on December 31.
1. Sanford Co. sells $500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.
2. Titania Co. sells $400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back $120,000 worth of bonds for $126,000
(includes accrued interest). Give entries through December 1, 2019.
Instructions
For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)
P14-6 (L01,2) GROUPWORK (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.
P14-7 (L01,2) (Entries for Life Cycle of Bonds) On April 1, 2017, Seminole Company sold 15,000 of its 11%, 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2018.
Instructions
Prepare the journal entries needed on the books of Seminole Company to record the following.
(a) April 1, 2017: issuance of the bonds.
(b) October 1, 2017: payment of semiannual interest.
(c) December 31, 2017: accrual of interest expense.
(d) March 1, 2018: extinguishment of 6,000 bonds. (No reversing entries made.)
P14-8 (L03) (Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from
Plato Corporation by issuing a $600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a $70,000 salvage value.
Instructions
(Round answers to the nearest cent.)
(a) Prepare the journal entry for the purchase on December 31, 2017.
(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effectiveinterest method) on December 31, 2018.
(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.
P14-9 (L03) (Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying $50,000 down and agreeing to pay the balance in four equal installments of $40,000 payable each
December 31. An assumed interest of 8% is implicit in the purchase price.
Instructions
Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.
(Round answers to the nearest cent.)
(a) December 31, 2016. (d) December 31, 2019.
(b) December 31, 2017. (e) December 31, 2020.
(c) December 31, 2018.
P14-10 (L01,2,5) GROUPWORK (Comprehensive Problem: Issuance, Classification, Reporting) The following are four independent situations.
(a) On March 1, 2018, Wilke Co. issued at 103 plus accrued interest $4,000,000, 9% bonds. The bonds are dated January 1, 2018, and pay interest semiannually on July 1 and January 1. In addition, Wilke Co. incurred $27,000 of bond issuance costs. Compute the net amount of cash received by Wilke Co. as a result of the issuance of these bonds.
(b) On January 1, 2017, Langley Co. issued 9% bonds with a face value of $700,000 for $656,992 to yield 10%. The bonds are dated January 1, 2017, and pay interest annually. What amount is reported for interest expense in 2017 related to these bonds, assuming that Langley used the effective-interest method for amortizing bond premium and discount?
(c) Tweedie Building Co. has a number of long-term bonds outstanding at December 31, 2017. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.
Indicate how this information should be reported in the financial statements at December 31, 2017.
(d) In the long-term debt structure of Beckford Inc., the following three bonds were reported: mortgage bonds payable $10,000,000; collateral trust bonds $5,000,000; bonds maturing in installments, secured by plant equipment $4,000,000.
Determine the total amount, if any, of debenture bonds outstanding.
P14-11 (L01) WRITING (Effective-Interest Method) Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why
GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help.
On June 30, 2017, Hobart Company issued $2,000,000 face value of 11%, 20-year bonds at $2,171,600, a yield of 10%. Hobart
Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.
Instructions
Using the data above for illustrative purposes, write a short memo (1–1.5 pages double-spaced) to Samantha, explaining what the effective-interest method is, why it is preferable, and how it is computed. (Do not forget to include an amortization schedule, referring to it whenever necessary.)
*P14-12 (L06) (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.
* P14-13 (L06) (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its $5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.
Instructions
The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.
(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at $3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,700,000.
(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,250,000 and a fair value of $4,000,000.
(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.
(d) Frontenac National Bank agrees to reduce the principal balance due to $4,166,667 and require interest only in the second and third year at a rate of 10%.
* P14-14 (L06) (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.
…
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.
