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Chapter 14: Q18Q (page 753)
Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
The difference between the fixed rate mortgage and the variable rate mortgage is in respect of the interest rate.
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Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.
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.
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 semi-annual interest.
(c) December 31, 2017: accrual of interest expense.
(d) March 1, 2018: extinguishment of 6,000 bonds. (No reversing entries made.)
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.
(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.
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