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- Wilbury Corporation issued 1 million of 13.5% bonds for 985,071.68. The bonds are dated and issued October 1, 2019, are due September 30, 2020, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%. Required: 1. Prepare a bond interest expense and discount amortization schedule using the straight-line method. 2. Prepare a bond interest expense and discount amortization schedule using the effective interest method. 3. Prepare adjusting entries for the end of the fiscal year December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. If income before interest and income taxes of 30% in 2020 is 500,000, compute net income under each alternative. 5. Assume the company retired the bonds on June 30, 2020, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight line method of amortization b. effective interest method of amortization 6. Compute the companys times interest earned (pretax operating income divided by interest expense) for 2020 under each alternative.Investment Premium Amortization Schedule On January 1, 2019, Lynch Company acquired 13% bonds with a face value of 50,000. The bonds pay interest on June 30 and December 31 and mature on December 31, 2021. Lynch paid 51,229.35, a price that yields a 12% effective annual interest rate. Required: 1. Record the purchase of the bonds. 2. Prepare an investment interest income and premium amortization schedule using the effective interest method. 3. Record the receipts of interest on June 30, 2019, and December 31, 2021.MASTERY PROBLEM Jackson, Inc.s fiscal year ends December 31. Selected transactions for the period 20-1 through 20-8 involving bonds payable issued by Jackson are as follows: 20-1 Oct. 31 Issued 600,000 of 10-year, 7%, callable bonds dated October 31, 20-1, for 612,000. Interest is payable semiannually on October 31 and April 30. The bond indenture provides that Jackson is to pay to the trustee bank 20,000 by May 15 of each year (except the tenth year) as a sinking fund for the retirement of the bonds on call or at maturity. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds (straight-line method). 20-2 Jan. 2 Reversed the adjusting entry for interest payable and bond premium amortization. Apr. 30 Paid the semiannual interest on the bonds and amortized six months premium. May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds. 31 Sinking fund earnings for the year were 900. 20-8 May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. 31 Redeemed the bonds, which were called at 97. The balance in the bond premium account is 3,600 after the payment of interest and amortization of premium have been entered. The cash balance in the sinking fund is 200,000, which is applied to the redemption. Jackson paid the sinking fund trustee the additional cash needed to pay off the bonds. (Hint: First make the entry for payment to the sinking fund, then make the entry for redemption of the bonds.) REQUIRED 1. Enter the preceding transactions in general journal form. 2. Calculate the carrying value of the bonds as of December 31, 20-2.
- Bats Corporation issued 800,000 of 12% face value bonds for 851,705.70. The bonds were dated and issued on April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. Bats sold the bonds to yield 10%. Required: 1. Prepare a bond interest expense and premium amortization schedule using the straight-line method. 2. Prepare a bond interest expense and premium amortization schedule using the effective interest method. 3. Prepare any adjusting entries for the end of the fiscal year, December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. Assume the company retires the bonds on June 30, 2020, at 103 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight-line method of amortization b. effective interest method of amortizationInvestment Discount Amortization Schedule On January 1, 2019, Rodgers Company purchased 200,000 face value, 10%, 3-year bonds for 190,165.35, a price that yields a 12% effective annual interest rate. The bonds pay interest semiannually on June 30 and December 31. Required: 1. Record the purchase of the bonds. 2. Prepare an investment interest income and discount amortization schedule using the effective interest method. 3. Record the receipts of interest on June 30, 2019, and June 30, 2021.Transfer between Categories On December 31, 2018, Leslie Company held an investment in bonds of Kaufmann Company which it categorized as being held to maturity. At that time, the 8%, 100,000 face value bonds had a carrying value of 107,023.56 and were being amortized using the effective interest method based on a market rate of 7%. Interest on these bonds is paid annually each December 31. On December 31, 2019, after recording the interest earned, Leslie decided to reclassify the Kaufmann bonds to its available-for-sale category in anticipation of a major restructuring. At that time, the ending quoted market price for the bonds was 105,000. Required: Prepare the journal entries on December 31, 2019, to record the interest earned and the reclassification.
- Held-to-Maturity Securities and Amortization of a Discount On January 1, 2019, Kelly Corporation acquired bonds with a face value of 500,000 for 483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2022, and are being held to maturity Required: Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the: 1. straight-line method of amortization 2. effective interest method of amortizationOn January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?Cornerstone Exercise (Appendix 9A) Bond Issue Price On January 1, 2021, Callahan Auto issued $900,000 of 9%, 10-year bonds. Interest is payable semiannually on June 30 and December 31. Required: What is the issue price if the bonds are sold to yield 8%? (Note: Round to the nearest dollar.)
- Refer to the information in RE13-5. Assume that on June 30, Aggie received interest on the Smith Corporation bonds. Prepare the June 30 journal entries to record the receipt of the interest. On April 30, 2019, Aggie Corporation purchased Smith Corporation 10%, 5-years bonds with a face value of 12,000 at par plus four months of accrued interest. Prepare the April 30 journal entry to record the purchase of these available-for-sale securities.Cornerstone Exercise 9-26 Debt Issued at Par On January 1, 2019, Brock & Co. issued S600,000 of bonds payable at par. The bonds have a 9% stated rate, pay interest on March 31, June 30, September 30, and December 31, and mature on December 31, 2019, Required: Prepare the journal entries to record the interest payment on June 30, 2019. Use the following information for Cornerstone Exercises 9-27 and 9-28: On January 1, 2020, Drew Company issued S350,000, 5-year bonds for $320,000. The stated rate of interest was 7% and interest is paid annually on December 31.
