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Chapter 14: Q5E (page 755)

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.

Short Answer

Expert verified

(a) The bonds are issued at$612,000.

(b) The business entity amortized a $102 premium on bonds payable.

(c) The business entity amortized a $107premium on bonds payable.

Step by step solution

01

Definition of Bonds Payable

Bond payable can be defined as the securities that are issued by the business to creditors for generating cash. It is reported as the non-current liability of the business entity.

02

Issuance of the bonds

Date

Accounts and explanation

Debit $

Credit $

1 Jan 2017

Cash($600,000×$102$100)

$612,000

Premium on bond payable

$12,000

Bonds payable

$600,000

(To record the issue of bonds on premium)

03

Payment of interest and related amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$29,898

Premium on bond payable

$102

Cash

$30,000

(To record the payment of interest and amortization of premium)

Working note:

Calculation of premium amortized:

Particular

Amount $

Interest @ 9.7705% on the book value of bond payable($612,000×9.7705%×12)

$29,898

Interest @ 10% on bond payablerole="math" localid="1658993146314" ($600,000×10%×12)

($30,000)

Amortization of premium

$102

04

Accrual of interest

Date

Accounts and Explanation

Debit $

Credit $

12 Dec 2017

Interest expenses

$29,893

Premium on bond payable

$107

Interest payable

$30,000

(To record the accrual of interest)

Particular

Amount $

Interest @ 9.7705% on the book value of bond payable(($612,000−$102)×9.7705%×12)

$29,893

Interest @ 10% on bond payable ($600,000×10%×12)

($30,000)

Amortization of premium

$107

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Most popular questions from this chapter

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 down payment 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 \(33,000 automobile, making a down payment of \)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?

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.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.

Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet.

The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account.

After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan.

Instructions

  1. What are project financing arrangements using special-purpose entities?
  2. What are take-or-pay contracts?
  3. Should Ryan record the plant as an asset together with the related obligation?
  4. If not, should Ryan record an asset relating to the future commitment?
  5. What is meant by off-balance-sheet financing?

Describe the two criteria for determining the valuation of financial assets.

BE14-2 (L01) The Colson Company issued $300,000 of 10% bonds on January 1, 2017. The bonds are due January 1, 2022, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.
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