P15-2A Kusmaul Electric sold $500,000, 10%, 10-year bonds ...
P15-2A Kusmaul Electric sold $500,000, 10%, 10-year bonds on January 1, 2010. The bonds were dated January 1 and paid interest on January 1 and July 1. The bonds were sold at 104. Hint: Prepare entries to record issuance of bonds, interest accrual, and bond redemption. (SO 2, 3, 6) Instructions (a) Prepare the journal entry to record the issuance of the bonds on January 1, 2010. (b) At December 31, 2010, the balance in the Premium on Bonds Payable account is $18,000. Show the balance sheet presentation of accrued interest and the bond liability at December 31, 2010. (c) On January 1, 2012, when the carrying value of the bonds was $516,000, the company redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the period has already been paid. Loss $9,000
(a) 2010
Jan. 1 Cash ($500,000 X 1.04) 520,000
Bonds Payable 500,000
Premium on Bonds Payable 20,000
(b) Current Liabilities
Bond interest payable
($500,000 X 10% X 1/2) $ 25,000
Long-term Liabilities
Bonds payable, due 2020 $500,000
Add: Premium on bonds payable 18,000 $518,000
(c) 2012
Jan. 1 Bonds Payable 500,000**
Premium on Bonds Payable 16,000**
Loss on Bond Redemption 9,000*
Cash ($500,000 X 1.05) 525,000
*($525,000 – $516,000)
P15-3A Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31, 2009. The proceeds from the note are to be used in financing a new research laboratory. The terms of the note provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $29,433. Payments are due June 30 and December 31. Hint: Prepare installment payments schedule and journal entries for a mortgage note payable. (SO 4) Instructions (a) Prepare an installment payments schedule for the first 2 years. (b) Prepare the entries for (1) the loan and (2) the first two installment payments. June 30 Mortgage Notes Payable $13,433 (c) Show how the total mortgage liability should be reported on the balance sheet at December 31, 2010. Current liability—2010: $29,639
|(a) |Semiannual | |Cash | |Interest | |Reduction of | |Principal |
| |Interest Period | |Payment | |Expense | |Principal | |Balance |
| | | | | | | | | | |
| |Issue Date | | | | | | | |$400,000 |
| |1 | |$29,433 | |$16,000 | |$13,433 | | 386,567 |
| |2 | | 29,433 | | 15,463 | | 13,970 | | 372,597 |
| |3 | | 29,433 | | 14,904 | | 14,529 | | 358,068 |
| |4 | | 29,433 | | 14,323 | | 15,110 | | 342,958 |
(b) 2009
Dec. 31 Cash 400,000
Mortgage Notes Payable 400,000
2010
June 30 Interest Expense 16,000
Mortgage Notes Payable 13,433
Cash 29,433
Dec. 31 Interest Expense 15,463
Mortgage Notes Payable 13,970
Cash 29,433
(c) 12/31/10
Current Liabilities
Current portion of mortgage notes payable $ 29,639 **
Long-term Liabilities
Mortgage notes payable, due 2019 $342,958 **
**($14,529 + $15,110)
**($372,597 – $14,529 – $15,110)
P15-4A Presented below are three different lease transactions that occurred for Kear Inc. in 2010. Assume that all lease contracts start on January 1, 2010. In no case does Kear receive title to the properties leased during or at the end of the lease term. Lessor Jansen Delivery Flood Co. Louis Auto Type of property Computer Delivery equipment Automobile Yearly rental $ 6,000 $ 4,200 $ 3,700 Lease term 6 years 4 years 2 years Estimated economic life 7 years 7 years 5 years Fair market value of lease asset $33,000 $19,000 $11,000 Present value of the lease rental payments $31,000 $13,000 $ 6,400 Bargain purchase option None None None Hint: Analyze three different lease situations and prepare journal entries. (SO 2) Instructions (a) Which of the leases above are operating leases and which are capital leases? Explain. (b) How should the lease transaction for Flood Co. be recorded in 2010? (c) How should the lease transaction for Jansen Delivery be recorded on January 1, 2010?
(a) Kear Inc. should record the Jansen Delivery lease as a capital lease because: (1) the lease term is greater than 75% of the estimated economic life of the leased property and (2) the present value of the lease payments is 90% or more of the fair market value of the computer. It should be noted that only one condition needs to be met to require capitalization.
Both the Flood Co. and Louis Auto leases should be reported as operating leases because none of the four conditions is met to require treatment as a capital lease.
(b) The Flood Co. lease is an operating lease. The entry to record the lease payment in 2010 therefore is as follows:
Rent Expense 4,200
Cash 4,200
(c) The Jansen Delivery lease is a capital lease. The entry to record the capital lease on January 1, 2010 therefore is as follows:
Leased Asset—Computer 31,000
Lease Liability 31,000
*P15-5A On July 1, 2010, Atwater Corporation issued $2,000,000 face value, 10%, 10-year bonds at $2,271,813. This price resulted in an effective-interest rate of 8% on the bonds. Atwater uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1. Hint: Prepare entries to record issuance of bonds, payment of interest, and amortization of bond premium using effective-interest method. (SO 2, 8) Instructions (Round all computations to the nearest dollar.) (a) Prepare the journal entry to record the issuance of the bonds on July 1, 2010. (b) Prepare an amortization table through December 31, 2011 (3 interest periods) for this bond issue. (c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2010. Amortization $9,127 (d) Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2011, assuming no accrual of interest on June 30. Amortization $9,493 (e) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2011. Amortization $9,872
(a) 2010
July 1 Cash 2,271,813
Bonds Payable 2,000,000
Premium on Bonds
Payable 271,813
(b) ATWATER CORPORATION
Bond Premium Amortization
Effective-Interest Method—Semiannual Interest Payments
10% Bonds Issued at 8%
| | |(A) | |(B) | |(C) | |(D) | |(E) |
|Semi- | | | | | |Premium | |Unamor- | |Bond |
|annual | |Interest | | | |Amor- | |tized | |Carrying |
|Interest | |to Be | |Interest | |tization | |Premium | |Value |
|Periods | |Paid | |Expense | |(A) – (B) | |(D) – (C) | |($2,000,000 + D) |
| | | | | | | | | | | |
|Issue date | | | | | | | |$271,813 | |$2,271,813 |
|1 | |$100,000 | |$90,873 | |$9,127 | | 262,686 | | 2,262,686 |
|2 | | 100,000 | | 90,507 | | 9,493 | | 253,193 | | 2,253,193 |
|3 | | 100,000 | | 90,128 | | 9,872 | | 243,321 | | 2,243,321 |
(c) Dec. 31 Bond Interest Expense
($2,271,813 X 4%) 90,873
Premium on Bonds Payable 9,127
Bond Interest Payable
($2,000,000 X 5%) 100,000
(d) 2011
July 1 Bond Interest Expense
[($2,271,813 – $9,127) X 4%] 90,507
Premium on Bonds Payable 9,493
Cash 100,000
(e) Dec. 31 Bond Interest Expense
[($2,262,686 – $9,493) X 4%] 90,128
Premium on Bonds Payable 9,872
Bond Interest Payable 100,000
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