PROBLEM SET C
PROBLEM 14-1C
Round dollar amounts to the nearest whole dollar. Assume no reversing entries are used.
Weaver Research Company issues bonds on January 1, 2008, that pay interest semiannually on
June 30 and December 31. The bonds have a $120,000 par value, the annual contract rate is 12%,
and the bonds mature in 15 years.
Required
For each of the following three separate situations, (a) determine the bonds’ issue price and (b)
prepare the journal entry to record their issuance.
1. Market rate at the date of issuance is 10%.
2. Market rate at the date of issuance is 12%.
3. Market rate at the date of issuance is 14%.
PROBLEM 14-2C
Divine Inc. issues $500,000 of 8%, 10-year bonds dated January 1, 2007, that pay interest
semiannually on June 30 and December 31. The bonds are issued at a price of $457,400.
Required
1. Prepare the January 1, 2007, journal entry to record the bonds’ issuance.
2. For each semiannual period, compute (a) the cash payment, (b) the straight-line discount
amortization, and (c) the bond interest expense.
3. Determine the total bond interest expense to be recognized over the bond’s life.
4. Prepare the first two years of an amortization table like Exhibit 14.7 using the straight-line
method.
5. Prepare the journal entries to record the first two interest payments.
6. Assume that the bonds are issued at a price of $542,600. Repeat parts 1 through 5.
PROBLEM 14-3C
Venus issues 9%, five-year bonds dated January 1, 2007, with a $300,000 par value. The bonds
pay interest on June 30 and December 31 and are issued at a price of $312,177. The annual
market rate is 8% on the issue date.
Required
1. Calculate the total bond interest expense over the bonds’ life.
2. Prepare a straight-line amortization table like Exhibit 14.11 for the bonds’ life.
3. Prepare journal entries to record the first two interest payments.
PROBLEM 14-4C
Refer to the bond details in Problem 14-3C.
Required
1. Compute the total bond interest expense over the bonds’ life.
2. Prepare an effective interest amortization table like the one in Exhibit 14.B2 for the bonds’
life.
3. Prepare the journal entries to record the first two interest payments.
4. Use the market rate at issuance to compute the present value of the remaining cash flows for
these bonds as of December 31, 2009. Compare your answer with the amount shown on the
amortization table as the balance for that date (from part 2) and explain your findings.
PROBLEM 14-5C
David Corporation issues $720,000 of 7%, four-year bonds dated January 1, 2007, that pay
interest semiannually on June 30 and December 31. The bonds are issued at a price of $650,168
and their market rate is 10% at the issue date.
Required
1. Prepare the January 1, 2007, journal entry to record the bonds’issuance.
2. Determine the total bond interest expense to be recognized over the bonds’ life.
3. Prepare a straight-line amortization table like the one in Exhibit 14.7 for the bonds’ first
two years.
4. Prepare the journal entries to record the first two interest payments.
Analysis Component
5. Assume the market rate on January 1, 2007, is 6% instead of 10%. Without providing
numbers, describe how this change would affect the amounts presented on David
Corporation’s financial statements.
Problem 14-6C
Refer to the bond details in Problem 14-5C.
Required
1. Prepare the January 1, 2007, journal entry to record the bonds’ issuance.
2. Determine the total bond interest expense that will be recognized over the bonds’ life.
3. Prepare an effective interest amortization table like Exhibit 14B.1 for the bonds’ first two
years.
4. Prepare the journal entries to record the first two interest payments.
PROBLEM 14-7C
Monabone Company issues $420,000 of 12%, five-year bonds dated January 1, 2007, that pay
interest semiannually on June 30 and December 31. They are issued at $488,147. Their market
rate is 8% at the issue date.
Required
1. Prepare the January 1, 2007, journal entry to record the bonds’ issuance.
2. Determine the total bond interest expense to be recognized over the bonds’ life.
3. Prepare an effective interest amortization table like Exhibit 14B.2 for the bonds’ first two
years.
4. Prepare the journal entries to record the first two interest payments.
5. Prepare the journal entry to record the bonds’ retirement on December 31, 2008, at 96.
Analysis Component
6. Assume that the market rate on January 1, 2007, is 13% instead of 8%. Without presenting
numbers, describe how this change would affect the amounts presented on Monabone’s financial
statements.
PROBLEM 14-8C
On October 31, 2007, Emig Ltd. borrows $150,000 from a bank by signing a five-year
installment note bearing 6% interest. The note requires equal total payments each year on
October 31.
Required
1. Compute the total amount of each installment payment.
2. Complete an amortization table for this installment note similar to Exhibit 14.16.
3. Prepare the journal entries in which Emig would record (a) accrued interest as of December
31, 2007 (the end of its annual reporting period), and (b) the first annual payment on the note.
PROBLEM 14-9C
At the end of the current year, the following information is available for both the Andruw
Company and the Hughes Company:
Andruw Co.
Hughes Co.
Total assets
$1,500,000
$720,000
Total liabilities
550,000
430,000
Total equity
950,000
290,000
.
Required
1. Compute the debt-to-equity ratio for each company
2. Comment on your results and discuss the riskiness of each company’s financing structure.
PROBLEM 14-10C
Sheila and The Screamers signs a 5-year capital lease with Santana Company for a practice and
storage facility. The annual lease payment is $12,000, and the interest rate is 9%.
Required
1. Compute the present value of Sheila and The Screamers five-year lease payments..
2. Prepare the journal entry to record Sheila and The Screamers capital lease at inception.
3. Complete a lease payment schedule with the following headings for the 5-years of the lease.
Assume the beginning balance of the lease liability (present value of lease payments) is $46,676.
(Hint: To find the amount allocated to interest in year 1, multiply the interest rate by the
beginning-of-year lease liability. The amount of the annual lease payment not allocated to interest
will be allocated to principal. Reduce the lease liability by the amount allocated to principal to
update the lease liability at each year-end.)
Period
Ending
Date
Beginning
Balance of
Lease
Liability
Interest on
Lease
Liability
Reduction of
Lease
Liability
Cash
Lease
Payment
Ending
Balance of
Lease
Liability
4. Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the
end of year 1. Assume zero salvage value for the facility.