Brief Exercise 14-1
Culver Corporation issues $430,000 of 9% bonds, due in 10 years, with interest payable semiannually.
At the time of issue, the market rate for such bonds is 10%.
Compute the issue price of the bonds. (Round present value factor calculations to 5 decimal
places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Issue price of the bonds
$
403,207
Present value of the principal ($430,000 x 0.37689)
$162,063
Present value of the interest payments ($19,350* x 12.46221)
Issue price
241,144
$403,207
*($430,000 x 9% x 6/12)
Brief Exercise 14-2
The Cullumber Company issued $250,000 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 Cullumber’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and
(c) the December 31 adjusting entry. (If no entry is required, select "No Entry" for the account
titles and enter 0 for the amounts. Credit account titles are automatically indented when
amount is entered. Do not indent manually. Round intermediate calculations to 6 decimal
places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)
No.
(a)
Date
Jan. 1, 2017
Account Titles and Explanation
Cash
Debit
250,000
Bonds Payable
(b)
July 1, 2017
Interest Expen
250,000
12,500
Cash
(c)
Dec. 31, 2017
Interest Expen
Interest Payab
(b) Cash ($250,000 x 10% x 6/12) = $12,500
Brief Exercise 14-3
Credit
12,500
12,500
12,500
The Ayayai Company issued $370,000 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 were issued at 99.
Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Ayayai
Company records straight-line amortization semiannually. (If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts. Credit account titles are
automatically indented when amount is entered. Do not indent manually. Round
intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal
places, e.g. 38,548.)
No.
Date
(a) January 1, 2017
Account Titles and Explanation
Debit
Cash
366,300
Discount on B
3,700
Bonds Payable
(b)
(c)
July 1, 2017
Dec. 31, 2017
Interest Expen
Credit
370,000
18,870
Discount on B
370
Cash
18,500
Interest Expen
18,870
Discount on B
370
Interest Payab
(a) Cash
= ($370,000 x 99%)
(b) Discount on Bonds Payable = ($3,700 x 1/10)
Cash
= $366,300
= $370
= ($370,000 x 10% x 6/12) = $18,500
(c) Discount on Bonds Payable = ($3,700 x 1/10)
= $370
Brief Exercise 14-4
The Whispering Company issued $260,000 of 11% bonds on January 1, 2017. The bonds are due
January 1, 2022, with interest payable each July 1 and January 1. The bonds were issued at 103.
Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The
Whispering Company records straight-line amortization semiannually. (If no entry is required,
select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles
are automatically indented when amount is entered. Do not indent manually. Round
intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal
places, e.g. 38,548.)
No.
Date
Account Titles and Explanation
Debit
Credit
(a) January 1, 2017
(b) July 1, 2017
Cash
267,800
Bonds Payable
260,000
Premium on Bo
7,800
Interest Expen
13,520
Premium on Bo
780
Cash
(c) December 31, 2017
14,300
Interest Expen
13,520
Premium on Bo
780
Interest Payab
(a) Cash
= ($260,000 x 103%)
(b) Premium on Bonds Payable = ($7,800 x 1/10)
Cash
14,300
= $267,800
= $780
= ($260,000 x 11% x 6/12) = $14,300
(c) Premium on Bonds Payable = ($7,800 x 1/10)
= $780
Brief Exercise 14-5
Sheridan Corporation issued $468,000 of 6% bonds on May 1, 2017. The bonds were dated January 1,
2017, and mature January 1, 2020, with interest payable July 1 and January 1. The bonds were issued
at face value plus accrued interest.
Prepare Sheridan’s journal entries for (a) the May 1 issuance, (b) the July 1 interest payment, and (c)
the December 31 adjusting entry. (If no entry is required, select "No Entry" for the account
titles and enter 0 for the amounts. Credit account titles are automatically indented when
amount is entered. Do not indent manually. Round intermediate calculations to 6 decimal
places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)
No.
(a)
(b)
Date
May 1, 2017
July 1, 2017
Account Titles and Explanation
Cash
Debit
Credit
477,360
Bonds Payable
468,000
Interest Expen
9,360
Interest Expen
Cash
14,040
14,040
(c)
Dec. 31, 2017
Interest Expen
14,040
Interest Payab
14,040
(a) Interest Expense $468,000 x 6% x 4/12 = $9,360
(b) Cash
$468,000 x 6% x 6/12 = $14,040
Brief Exercise 14-6
On January 1, 2017, Waterway Corporation issued $500,000 of 7% bonds, due in 10 years. The bonds
were issued for $466,026, and pay interest each July 1 and January 1. Waterway uses the effectiveinterest method.
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. Assume an effective-interest rate of 8%. (Round
intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal
places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter
0 for the amounts. Credit account titles are automatically indented when amount is entered.
Do not indent manually.)
No.
Date
(a) Jan. 1, 2017
Account Titles and Explanation
Debit
Cash
466,026
Discount on B
33,974
Bonds Payable
(b)
(c)
July 1, 2017
Dec. 31, 2017
Interest Expen
500,000
18,641
Cash
17,500
Discount on B
1,141
Interest Expen
18,687
Interest Payab
17,500
Discount on B
1,187
(b) Interest Expense = $466,026 x 8% x 6/12 = $18,641
Cash
Credit
= $500,000 x 7% x 6/12 = $17,500
(c) Interest Expense = $467,167* x 8% x 6/12 = $18,687
*($466,026 + 1,141)
Brief Exercise 14-7
On January 1, 2017, Cheyenne Corporation issued $510,000 of 7% bonds, due in 8 years. The bonds
were issued for $542,033, and pay interest each July 1 and January 1. 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. Cheyenne uses the effective-interest method. (Round
intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal
places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter
0 for the amounts. Credit account titles are automatically indented when amount is entered.
Do not indent manually.)
No.
Date
Account Titles and Explanation
(a) January 1, 2017
Cash
(b) July 1, 2017
Debit
542,033
Bonds Payable
510,000
Premium on Bo
32,033
Interest Expen
16,261
Premium on Bo
1,589
Cash
(c) December 31, 2017
Credit
17,850
Interest Expen
16,213
Premium on Bo
1,637
Interest Payab
17,850
(b) Interest Expense = $542,033 x 6% x 6/12 = $16,261
Cash
= $510,000 x 7% x 6/12 = $17,850
(c) Interest Expense = $540,444* x 6% x 6/12 = $16,213
*($542,033 - $1,589)
Brief Exercise 14-8
Headland Corporation issued $500,000 of 7% bonds on November 1, 2017, for $537,196. The bonds
were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and
November 1. Headland uses the effective-interest method with an effective rate of 6%.
Prepare Headland’s December 31, 2017, adjusting entry. (Round intermediate calculations to 6
decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548. If no entry
is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit
account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
December 31, 2017
Debit
Interest Expen
5,372
Premium on Bo
461
Interest Payab
Credit
5,833
Interest Expense
($537,196 x 6% x 2/12) = $5,372
Interest Payable
($500,000 x 7% x 2/12) = $5,833
Brief Exercise 14-9
On January 1, 2017, Splish Corporation redeemed $430,000 of bonds at 99. At the time of
redemption, the unamortized premium was $12,900.
Prepare the corporation’s journal entry to record the reacquisition of the bonds. (If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts. Credit
account titles are automatically indented when amount is entered. Do not indent manually.
Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0
decimal places, e.g. 38,548.)
Account Titles and Explanation
Debit
Bonds Payable
430,000
Premium on Bo
12,900
Credit
Gain on Redem
17,200
Cash
425,700
Brief Exercise 14-10
Sandhill, Inc. issued a $115,000, 4-year, 12% note at face value to Flint Hills Bank on January 1,
2017, and received $115,000 cash. The note requires annual interest payments each December 31.
Prepare Sandhill’s journal entries to record (a) the issuance of the note and (b) the December 31
interest payment. (If no entry is required, select "No Entry" for the account titles and enter 0
for the amounts. Credit account titles are automatically indented when amount is entered.
Do not indent manually.)
No.
(a)
Date
Jan. 1, 2017
Account Titles and Explanation
Cash
Debit
115,000
Notes Payable
(b)
Dec. 31, 2017
Interest Expen
Credit
115,000
13,800
Cash
13,800
(b) Cash $115,000 x 12% = $13,800
Brief Exercise 14-11
Sweet Corporation issued a 5-year, $69,000, zero-interest-bearing note to Brown Company on
January 1, 2017, and received cash of $40,948. The implicit interest rate is 11%.
Prepare Sweet’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of
interest. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts. Credit account titles are
automatically indented when amount is entered. Do not indent manually.)
No.
Date
Account Titles and Explanation
(a) January 1, 2017
Debit
Cash
40,948
Discount on N
28,052
Notes Payable
(b) December 31, 2017
Interest Expen
Credit
69,000
4,504
Discount on N
4,504
(b) Discount on Notes Payable ($40,948 x 11%) = $4,504
Brief Exercise 14-12
Bridgeport Corporation issued a 4-year, $42,000, 4% note to Greenbush Company on January 1,
2017, and received a computer that normally sells for $28,810. The note requires annual interest
payments each December 31. The market rate of interest for a note of similar risk is 15%.
Prepare Bridgeport’s journal entries for (a) the January 1 issuance and (b) the December 31
interest. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts. Credit account titles are
automatically indented when amount is entered. Do not indent manually.)
No.
Date
(a) January 1, 2017
Account Titles and Explanation
Debit
Equipment
28,810
Discount on N
13,190
Notes Payable
Credit
42,000
(b) December 31, 2017
Interest Expen
4,322
Cash
1,680
Discount on N
2,642
(b) Interest Expense = $28,810 x 15% = $4,322
Cash
= $42,000 x 4% = $1,680
Brief Exercise 14-15
At December 31, 2017, Pearl Corporation has the following account balances:
Bonds payable, due January 1, 2026
$1,600,000
Discount on bonds payable
85,000
Interest payable
75,000
Show how the above accounts should be presented on the December 31, 2017, balance sheet,
including the proper classifications. (Enter account name only and do not provide descriptive
information.)
Pearl Corporation
Balance Sheet (Partial)
December 31, 2017
Current Liabilities
Interest Payab
$
75,000
Long-term Liabilities
Bonds Payable
$
1,600,000
Less
:
85,000
Discount on B
$
1,515,000
Exercise 14-5
Stellar Company issued $660,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is
payable semiannually on July 1 and January 1. Stellar Company uses the effective-interest method of
amortization for bond premium or discount. Assume an effective yield of 9.7705%.
Prepare the journal entries to record the following. (Round intermediate calculations to 6 decimal
places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts. Credit
account titles are automatically indented when amount is entered. Do not indent manually.)
(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.
Date
1/1/17
7/1/17
Account Titles and Explanation
Cash
Debit
Credit
673,200
Bonds Payable
660,000
Premium on Bo
13,200
Interest Expen
32,888
Premium on Bo
112
Cash
12/31/17
33,000
Interest Expen
32,882
Premium on Bo
118
Interest Payab
33,000
1/1/17
Cash
7/1/17
Interest Expense = ($673,200 x 9.7705% x 1/2) = $32,888
Cash
= ($660,000 x 102%)
= $673,200
= ($660,000 x 10% x 6/12)
= $33,000
12/31/17 Interest Expense = ($673,088 x 9.7705% x 1/2) = $32,882
Carrying amount of bonds at July 1, 2017:
Carrying amount of bonds at January 1, 2017
Amortization of bond premium ($33,000 – $32,888)
Carrying amount of bonds at July 1, 2017
Exercise 14-7
$673,200
(112)
$673,088
Sarasota Company sells 10% bonds having a maturity value of $2,150,000 for $1,995,003. The bonds
are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.
Determine the effective-interest rate. (Round answer to 0 decimal places, e.g. 18%.)
The effective-interest rate
%
12
The effective-interest or yield rate is 12%. It is determined through trial and error using Table 6-2 for
the discounted value of the principal ($1,219,975) and Table 6-4 for the discounted value of the
interest ($775,028); $1,219,975 plus $775,028 equals the proceeds of $1,995,003. (A financial
calculator may be used to determine the rate of 12%.)
Set up a schedule of interest expense and discount amortization under the effective-interest
method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final
answer to 0 decimal places, e.g. 38,548.)
Schedule of Discount Amortization
Effective-Interest Method
Cash
Paid
Year
Interest
Expense
$
Jan. 1, 2017
Discount
Amortized
$
Carrying
Amount of Bonds
$
$
1,995,003
Jan. 1, 2018
215,000
239,400
24,400
2,019,403
Jan. 1, 2019
215,000
242,328
27,328
2,046,731
Jan. 1, 2020
215,000
245,608
30,608
2,077,339
Jan. 1, 2021
215,000
249,281
34,281
2,111,620
Jan. 1, 2022
215,000
253,394
38,394
2,150,014
Schedule of Discount Amortization
Effective-Interest Method (12%)
Year
Cash
Paid
Interest
Expense
Discount
Carrying
Amortized Amount of Bonds
Jan. 1, 2017
$1,995,003
Jan. 1, 2018 $215,000 $239,400*
$24,400
2,019,403
Jan. 1, 2019
215,000
242,328
27,328
2,046,731
Jan. 1, 2020
215,000
245,608
30,608
2,077,339
Jan. 1, 2021
215,000
249,281
34,281
2,111,620
Jan. 1, 2022
215,000
253,394
38,394
2,150,014**
*$239,400 = $1,995,003 x 0.12.
** Difference due to rounding.
Exercise 14-9
On June 30, 2017, Whispering Company issued $4,700,000 face value of 13%, 20-year bonds at
$5,053,579, a yield of 12%. Whispering uses the effective-interest method to amortize bond premium
or discount. The bonds pay semiannual interest on June 30 and December 31.
Prepare the journal entries to record the following transactions. (Round answer to 0 decimal
places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter
0 for the amounts. Credit account titles are automatically indented when amount is entered.
Do not indent manually.)
(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.
No.
Date
Account Titles and Explanation
(1) June 30, 2017
Cash
(2) December 31, 2017
Debit
5,053,579
Bonds Payable
4,700,000
Premium on Bo
353,579
Interest Expen
303,215
Premium on Bo
2,285
Cash
(3) June 30, 2018
305,500
Interest Expen
303,078
Premium on Bo
2,422
Cash
(4) December 31, 2018
305,500
Interest Expen
302,932
Premium on Bo
2,568
Cash
(2) Interest Expense = ($5,053,579 x 12% x 6/12)
Cash
Credit
= ($4,700,000 x 13% x 6/12)
(3) Interest Expense = [($5,053,579 – $2,285) x 12% x 6/12]
305,500
= $303,215
= $305,500
= $303,078
(4) Interest Expense = [($5,053,579 – $2,285 – $2,422) x 12% x 6/12] = $302,932
Show the proper balance sheet presentation for the liability for bonds payable on the December 31,
2018, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.)
Whispering Company
Balance Sheet
December 31, 2018
Long-term Liabilities
$
Bonds Payable
4,700,000
Premium on Bo
346,304
$
Book Value of Bonds Payable
5,046,304
Premium on Bonds Payable = ($5,053,579 – $4,700,000) – ($2,285 + $2,422 + $2,568) = $346,304
Provide the answers to the following questions.
(1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places,
e.g. 38,548.)
Interest expense reported for 2018
$
606,010
(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?
The bond interest expense reported in 2018 will be
greater 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. (Round answer to 0 decimal
places, e.g. 38,548.)
Total cost of borrowing over the life of the bond
$
11,866,421
(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?
The total bond interest expense for the life of the bond will be
the same as
the total interest expense if the straight-line method of amortization were used.
(1) Interest expense for the period from
January 1 to June 30, 2018 from (a) 3
$303,078
Interest expense for the period from
July 1 to December 31, 2018 from (a) 4
302,932
Amount of bond interest expense reported for 2018 $606,010
(2) The amount of bond interest expense reported in 2018 will be greater than the amount that
would be reported if the straight-line method of amortization were used. Under the straight-line
method, the amortization of bond premium is $17,679 ($353,579/20). Bond interest expense for 2018
is the difference between the amortized premium, $17,679, and the actual interest paid,
$611,000 ($4,700,000 x 13%). Thus, the amount of bond interest expense is $593,321 ($611,000 –
$17,679), which is smaller than the bond interest expense under the effective-interest method.
(3) Total interest to be paid for the bond ($4,700,000 x 13% x 20)
$12,220,000
Principal due in 2034
4,700,000
Total cash outlays for the bond
16,920,000
Cash received at issuance of the bond
5,053,579
Total cost of borrowing over the life of the bond
$11,866,421
Exercise 14-12
On January 2, 2012, Martinez Corporation issued $1,000,000 of 10% bonds at 96 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, Martinez called
$600,000 face amount of the bonds and redeemed them.
Ignoring income taxes, compute the amount of loss, if any, to be recognized by Martinez as a result of
retiring the $600,000 of bonds in 2017. (Round answer to 0 decimal places, e.g. 38,548.)
Loss on redemption
$
18,000
Prepare the journal entry to record the redemption. (Round answers to 0 decimal places, e.g.
38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts. Credit account titles are automatically indented when amount is entered. Do not
indent manually.)
Date
January 2, 2017
Account Titles and Explanation
Debit
Bonds Payable
600,000
Loss on Rede
18,000
Credit
Discount on B
12,000
Cash
606,000
Reacquisition price ($600,000 x 101%)
$606,000
Less: Net carrying amount of bonds redeemed:
Par value
$600,000
Unamortized discount
(12,000)
Loss on redemption
588,000
$ 18,000
Calculation of unamortized discountOriginal amount of discount:
Amount of discount unamortized:
$600,000 x 4% = $24,000
$24,000/10
= $2,400 amortization per year
$2,400 x 5
= $12,000
Exercise 14-13
Shamrock, Inc. had outstanding $5,820,000 of 10% bonds (interest payable July 31 and January 31)
due in 10 years. On July 1, it issued $9,240,000 of 11%, 15-year bonds (interest payable July 1 and
January 1) at 98. A portion of the proceeds was used to call the 10% bonds (with unamortized
discount of $58,200) at 101 on August 1.
Prepare the journal entries necessary to record issue of the new bonds and the refunding of the
bonds. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts. Credit account titles are
automatically indented when amount is entered. Do not indent manually.)
Date
July 1
Account Titles and Explanation
Debit
Cash
9,055,200
Discount on B
184,800
Bonds Payable
Credit
9,240,000
(To record issuance of 11% bonds)
August 1
Bonds Payable
5,820,000
Loss on Rede
116,400
Cash
5,878,200
Discount on B
58,200
(To record retirement of 10% bonds)
Discount on Bonds Payable = (0.02 x $9,240,000) = $184,800
Cash
= ($5,820,000 x 1.01) = $5,878,200
Reacquisition price
Less: Net carrying amount of bonds redeemed:
$5,878,200
Par value
$5,820,000
Unamortized bond discount
(58,200)
5,761,800
Loss on redemption
$ 116,400
Exercise 14-26
Bridgeport Co. owes $198,200 to Indigo Inc. The debt is a 10-year, 11% note. Because Bridgeport Co.
is in financial trouble, Indigo Inc. agrees to accept some land and cancel the entire debt. The land has
a book value of $98,000 and a fair value of $141,200.
(a) Prepare the journal entry on Bridgeport’s books for debt restructure.
(b) Prepare the journal entry on Indigo’s books for debt restructure.
(If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.
Credit account titles are automatically indented when amount is entered. Do not indent
manually.)
No. Account Titles and Explanation
Debit
Credit
(a) Bridgeport Co.'s entry:
Notes Payable
198,200
Land
98,000
Gain on Dispo
43,200
Gain on Restru
57,000
(b) Indigo Inc. entry:
Land
141,200
Allow ance for
57,000
Notes Receiva
(a) Gain on Disposal of Land
198,200
= ($141,200 – $98,000) = $43,200
Gain on Restructuring of Debt = $198,200 – $141,200 = $57,000
Exercise 14-27
Bonita Corp. owes $280,000 to Windsor Trust. The debt is a 10-year, 12% note due December
31, 2017. Because Bonita Corp. is in financial trouble, Windsor Trust agrees to extend the
maturity date to December 31, 2019, reduce the principal to $225,000, and reduce the interest
rate to 6%, payable annually on December 31.
(a) Prepare the journal entries on Bonita’s books on December 31, 2017, 2018, 2019.
(b) Prepare the journal entries on Windsor Trust’s books on December 31, 2017, 2018, 2019.
(Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer
to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles
and enter 0 for the amounts. Credit account titles are automatically indented when amount is
entered. Do not indent manually.)
(a) Date Account Titles and Explanation
Debit
Credit
Bonita Corp.’s
2017
Notes Payable
Gain on Restru
28,000
28,000
2018
Notes Payable
13,500
Cash
2019
13,500
Notes Payable
238,500
Cash
238,500
(b) Date Account Titles and Explanation
Debit
Credit
Windsor Trust’s
2017
Bad Debt Expe
77,816
Allow ance for
2018
77,816
Cash
13,500
Allow ance for
10,762
Interest Reven
2019
24,262
Cash
13,500
Allow ance for
12,054
Interest Reven
25,554
(To record Interest Revenue)
Cash
225,000
Allow ance for
55,000
Notes Receiva
280,000
(To record maturity of Notes Receivable)
Bonita Corp.’s
2018 Cash (6% x $225,000) = $13,500
2019 Cash [$225,000 + (6% x $225,000)] = $238,500
Windsor Trust’s
Pre-restructure carrying amount
$280,000
Present value of restructured cash flows:
Present value of $225,000 due in 2 years
at 12%, interest payable annually;
(225,000 x 0.79719)
Present value of $13,500 interest payable
$179,368
annually for 2 years at 12%;
($13,500 x 1.69005)
22,816
Creditor’s loss on restructuring of debt
Date
$ (77,816)
Increase
Carrying
Cash
Effective- in Carrying Amount of
Interest Interest
Amount
Note
12/31/17
$202,184
12/31/18 $13,500a
12/31/19
202,184
13,500
$24,262b
$10,762c
212,946
25,554
12,054
225,000
a
$13,500 = $225,000 x 6%
b
$24,262 = $202,184 x 12%
c
$10,762 = $24,262 – $13,500