P14-5 (Comprehensive Bond Problem) In each of the ...



P14-5 (Comprehensive Bond Problem) In each of the following independent cases the company closes

its books on December 31.

1. Danny Ferry Co. sells $250,000 of 10% bonds on March 1, 2007. The bonds pay interest on September

1 and March 1. The due date of the bonds is September 1, 2010. The bonds yield 12%. Give

entries through December 31, 2008.

2. Brad Dougherty Co. sells $600,000 of 12% bonds on June 1, 2007. The bonds pay interest on

December 1 and June 1. The due date of the bonds is June 1, 2011. The bonds yield 10%. On

October 1, 2008, Dougherty buys back $120,000 worth of bonds for $126,000 (includes accrued

interest). Give entries through December 1, 2009.

Instructions

(Round to the nearest dollar.)

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated.

Use the effective interest method for discount and premium amortization (construct amortization tables

where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing

entries were made.)

|1. Danny Ferry Co. |

| | | | |

|3/1/01 |Cash |236,045 | |

| |Discount on Bonds Payable |13,955 | |

| | Bonds Payable | |250,000 |

| | | | |

|Maturity value of bonds payable | |$250,000 |

|Present value of $250,000 due in 7 periods at 6% | | |

| ($250,000 X .66506) |$166,265 | |

|Present value of interest payable semiannually | | |

| ($12,500 X 5.58238) | 69,780 | |

|Proceeds from sale of bonds | | (236,045) |

|Discount on bonds payable | |$ 13,955 |

|9/1/01 |Interest Expense |14,163 | |

| | Discount on Bonds Payable | |1,663 |

| | Cash | |12,500 |

| | | | |

|12/31/01 |Interest Expense |9,508 | |

| | Discount on Bonds Payable | |1,175 |

| | ($1,762 X 4/6) | | |

| | Interest Payable ($12,500 X 4/6) | |8,333 |

| | | | |

|3/1/02 |Interest Expense |4,754 | |

| |Interest Payable |8,333 | |

| | Discount on Bonds Payable | |587 |

| | ($1,762 X 2/6) | | |

| | Cash | |12,500 |

| | | | |

|9/1/02 |Interest Expense |14,368 | |

| | Discount on Bonds Payable | |1,868 |

| | Cash | |12,500 |

| | | | |

|12/31/02 |Interest Expense |9,653 | |

| | Discount on Bonds Payable | |1,320 |

| | ($1,980 X 4/6) | | |

| | Interest Payable | |8,333 |

|Schedule of Bond Discount Amortization |

|Effective Interest Method |

|10% Bonds Sold to Yield 12% |

| | | | |Debit | |Credit | |Carrying Value of Bonds |

| | |Credit | |Interest Expense | |Bond | | |

|Date | |Cash | | | |Discount | | |

|3/1/01 | | | | | | | |$236,045 |

|9/1/01 | |$12,500 | |$14,163 | |$1,663 | | 237,708 |

|3/1/02 | | 12,500 | | 14,262 | | 1,762 | | 239,470 |

|9/1/02 | | 12,500 | | 14,368 | | 1,868 | | 241,338 |

|3/1/03 | | 12,500 | | 14,480 | | 1,980 | | 243,318 |

|9/1/03 | | 12,500 | | 14,599 | | 2,099 | | 245,417 |

|3/1/04 | | 12,500 | | 14,725 | | 2,225 | | 247,642 |

|9/1/04 | | 12,500 | | 14,858 | | 2,358 | | 250,000 |

|2. Dougherty Co. |

| | | | |

|6/1/01 |Cash |638,780 | |

| | Premium on Bonds Payable | |38,780 |

| | Bonds Payable | |600,000 |

| | | | |

|Maturity value of bonds payable | |$600,000 |

|Present value of $600,000 due in 8 periods at 5% | | |

| ($600,000 X .67684) |$406,104 | |

|Present value of interest payable semiannually | | |

| ($36,000 X 6.46321) | 232,676 | |

|Proceeds from sale of bonds | | 638,780 |

|Premium on bonds payable | |$ 38,780 |

|12/1/01 |Interest Expense |31,939 | |

| |Premium on Bonds Payable |4,061 | |

| | Cash ($600,000 X .12 X 6/12) | |36,000 |

| | | | |

|12/31/01 |Interest Expense ($31,736 X 1/6) |5,289 | |

| |Premium on Bonds Payable Payable |711 | |

| | ($4,264 X 1/6) | | |

| | Interest Payable ($36,000 X 1/6) | |6,000 |

|6/1/02 |Interest Expense ($31,736 X 5/6) |26,447 | |

| |Interest Payable |6,000 | |

| |Premium on Bonds Payable |3,553 | |

| | ($4,264 X 5/6) | | |

| | Cash | |36,000 |

| | | | |

|10/1/02 |Interest Expense |4,203 | |

| | ($31,523 X .2* X 4/6) | | |

| |Premium on Bonds Payable |597 | |

| | ($4,477 X .2 X 4/6) | | |

| | Cash | |4,800 |

| |*$120,000 ( $600,000 = .2 | | |

| | | | |

|10/1/02 |Bonds Payable |120,000 | |

| |Premium on Bonds Payable |5,494 | |

| | Gain on Redemption of Bonds | |4,294 |

| | Cash | |121,200 |

| | | | |

|Reacquisition price | | |

| ($126,000 – $120,000 X 12% X 4/12) | |$121,200 |

|Net carrying amount of bonds redeemed: | | |

| Par value |$120,000 | |

| Unamortized premium | | |

| [.2 X ($38,780 – $4,061 – $4,264) – $597] | 5,494 | (125,494) |

| Gain on redemption | |$ (4,294) |

|12/1/02 |Interest Expense ($31,523 X .8*) |25,218 | |

| |Premium on Bonds Payable |3,582 | |

| | ($4,477 X .8) | | |

| | Cash ($36,000 X .8) | |28,800 |

| |*($600,000 – $120,000) ( $600,000 = .8 | | |

| | | | |

|12/31/02 |Interest Expense |4,173 | |

| | ($31,299 X .8 X 1/6) | | |

| |Premium on Bonds Payable |627 | |

| | ($4,701 X .8 X 1/6) | | |

| | Interest Payable | |4,800 |

| | ($36,000 X .8 X 1/6) | | |

|6/1/03 |Interest Expense ($31,299 X .8 X 5/6) |20,866 | |

| |Interest Payable |4,800 | |

| |Premium on Bonds Payable |3,134 | |

| | ($4,701 X .8 X 5/6) | | |

| | Cash ($36,000 X .8) | |28,800 |

| | | | |

|12/1/03 |Interest Expense ($31,064 X .8) |24,851 | |

| |Premium on Bonds Payable |3,949 | |

| | ($4,936 X .8) | | |

| | Cash ($36,000 X .8) | |28,800 |

| | | | |Debit | |Debit | |Carrying Value of Bonds |

| | |Cash Credit | |Interest Expense | |Bond | | |

|Date | | | | | |Premium | | |

|6/1/01 | | | | | | | |$638,780 |

|12/1/01 | |$36,000 | |$31,939 | |$4,061 | | 634,719 |

|6/1/02 | | 36,000 | | 31,736 | | 4,264 | | 630,455 |

|12/1/02 | | 36,000 | | 31,523 | | 4,477 | | 625,978 |

|6/1/03 | | 36,000 | | 31,299 | | 4,701 | | 621,277 |

|12/1/03 | | 36,000 | | 31,064 | | 4,936 | | 616,341 |

|6/1/04 | | 36,000 | | 30,817 | | 5,183 | | 611,158 |

|12/1/04 | | 36,000 | | 30,558 | | 5,442 | | 605,716 |

|6/1/05 | | 36,000 | | 30,284* | | 5,716 | | 600,000 |

*$1.80 adjustment due to rounding.

I5-1:

The following information is available concerning The Blue Collar Company’s payroll for November, 2009:

|Employee |Date |October |November Earnings |Federal Income Tax |State Income Tax |

| |of Hire |Year to | |Withheld |Withheld |

| | |Date Earnings | | | |

| | | | | | |

|Z. Allen |1/6/2002 |$104,000 |$10,600 |$3,200 |$250 |

|G. Burns |9/1/2009 |6,000 |3,000 |600 |45 |

|C. Gunn |5/1/2001 |100,000 |10,000 |3,000 |225 |

|B. Stark |11/1/2001 |0 |3,500 |700 |55 |

|K. Veil |3/1/2003 |110,000 |11,000 |3,500 |265 |

Blue Collar pays wages monthly.

The O.A.S.D.I. rate is 6.2% on the first $106,800 of earnings.

The Hospital Insurance tax is 1.45%.

The federal unemployment tax is 6.2% on the first $7,000 of earnings.

The state unemployment tax is 5.5% on the first $7,000 of earnings. However, because of Blue Collar’s excellent merit rating, the rate has been reduced to 2.5%. Employees do not pay state unemployment taxes.

Instructions:

1. Prepare the journal entries necessary to record the November payroll and all taxes.

The O.A.S.D.I. Tax for each person would be based on when the earnings reach $106,800.

Z. Allen - Earnings already $104,000 and so only balance $2,800 would be subject to tax = 2,800 X 6.2 % = 173.6

G. Burns = 3,000 X 6.2% = 186

C. Gunn - Earnings already $100,000 and tax would be on remaining 6,800 = 6,800 X 6.2% = 421.60

B. Stark = 3,500 X 6.2% = 217

K. Veil - earnings already over 106,800 and so no tax

Total O.A.S.D.I tax is $998.20

Total Federal income tax withheld is $11,000

Total state income tax withheld is $840

Total earnings for November are $38,100

Hospital tax is 38,100 X 1.45% = $552.45

Total deductions are 998.20 + 11,000+840 + 552.45 = 13,390.65

Gross Pay is 38,100

Net Pay = 38,100-13,390.65 = $24,709.35

The journal entry to record November payroll is

Salaries and Wages Expense 38,100

O.A.S.D.I.  Payable 998.20

Federal Income Tax Payable 11,000

State Income Tax Payable 840

Hospital Insurance Tax Payable 552.45

Salaries and Wages Payable 24,709.35

The payroll taxes are

O.A.S.D.I 998.20

Hospital Insurance Tax 552.45

Federal unemployment tax is limited to $7,000 and so would be paid on $1,000 income of G. Burns and 3,500 of B. Stark

Federal unemployment tax = 4,500 X 6.2% = 279

State unemployment tax is also on first $7,000 and so would be paid on 4,500 X 2.5% = 112.50

Total payroll tax expense = 998.20+552.45 + 279+112.5 = $1,942.15

The journal entry is

Payroll Tax Expense 1,942.15

O.A.S.D.I.  Payable 998.20

Hospital Insurance Tax Payable 552.45

Federal Unemployment Tax Payable 279

State Unemployment Tax Payable 112.50

I5-2:

The Hill Valley Company had the following gross sales on Tuesday March 3rd:

Credit Sales: $45,950.67

Cash Sales: $23,575.45

The sales include the state’s 5.5% sales tax.

Instructions:

1. Prepare the journal entry to properly record the day’s sales.

We first calculate the tax amount on each sale. The tax rate is 5.5%. The sales with sales tax are

Credit sales = 45,950.67/1.055 = 43,555.14

Tax amount is 45,950.67 – 43,555.14 = 2,395.53

Cash sales = 23,575.45/1.055 = 22,346.40

Tax amount = 23,575.45 – 22,346.40 = 1,229.05

The entry to record the sales is

March 3 Cash 23,575.45

Accounts Receivable 45,950.67

Sales 65,901.54

Sales Tax Payable 3,624.58

I5-3:

Consider the following independent situations of the Back Fire Corporation (BFC):

1. A BFC deliver truck was involved in an accident with a private automobile. BFC carries an insurance deductible of $25,000 per accident. That is, BFC must pay the first $25,000 of any costs as a result of a traffic accident. The driver of the automobile was slightly injured and the damage to the automobile was approximately $8,000. The insurance adjustor estimated that the total cost to repair the automobile and for the driver’s injuries will be about $10,000. The accident was a result of the automobile running a stop sign and the adjustor advises that it is unlikely that BFC will be required to pay for the automobile repairs or the driver’s injury.

2. BFC sued the ABC Company for a patent infringement issue. BFC lawyers indicate that they are 100% sure that BFC will win the suit and collect $200,000 from ABC.

3. A retaining wall at one of BFC’s factories failed and caused a mud slide that damaged the building next door belonging to the XYZ Company. BFC has admitted responsibility and has received bids from three contractors to repair the damage. The estimated were $103,000; $77,500; and $154,000.

4. A leak at an underground storage tank contaminated the adjacent property belonging to the PDQ Company. The approximate costs to repair the damage is $45,000 and BFC’s insurance should reimbursement BFC for the costs except for the deductible of $5,000.

Instructions:

1. For each of the above situations determine the amount that should be recorded as a contingent liability, if any.

I5-4:

The XYZ Company entered into the following leasing arrangements, as the lessee, during the current year:

A. XYZ leased a copy machine for 3 years. The fair market value of the machine at the inception of the lease was $17,500 and XYZ agreed to pay a quarterly lease payment of $1,475. At the end of the lease the remaining life is estimated to be 2 years and XYZ has the option to purchase the copy machine for its then estimated fair market value of $5,000.

B. XYZ leased a mid-range computer for 4 years. The fair market value of the computer at the inception of the lease was $139,000 and XYZ agreed to pay a quarterly lease payment of $9,000. At the end of the lease the remaining life is estimated to be 2 years. XYZ has no option to purchase the computer at any time during the lease term.

C. XYZ leased a new car for 2 years for its president’s use. The fair market value of the car at the inception of the lease was $65,000 and XYZ agreed to pay a quarterly lease payment of $5,750. At the end of the lease the remaining life is estimated to be 4 years. XYZ has no option to purchase the car at any time during the lease term.

D. XYZ leased a delivery truck for 5 years. The fair market value of the truck at the inception of the lease was $84,000 and XYZ agreed to pay a quarterly lease payment of $4,500. At the end of the lease the fair market value of the truck is estimated to be $24,000 and the truck’s remaining economic life is estimated to be 2 years. XYZ has the option to purchase the truck at the end of the lease for $10,000.

E. XYZ leased a collation machine for 6 years. The fair market value of the machine at the inception of the lease was $142,000 and XYZ agreed to pay a quarterly lease payment of $6,750. At the end of the lease, the ownership of the machine transfers to XYZ.

F. XYZ leased a widget production machine for 7 years. The fair market value of the machine at the inception of the lease was $246,000 and XYZ agreed to pay a quarterly lease payment of $11,000. XYZ has no option to purchase the machine at any time during the lease term.

XYZ current borrowing rate is 10%.

All lease payments are made in advance at the beginning of each quarter.

Instructions:

1) Determine if each lease is an operating or a capital lease.

2) For each capital lease, identify the factor or factors that qualify the lease as a capital lease. Include the appropriate calculations to support your conclusions.

A lease is a capital lease if it meets any one of the following four criteria –

a. There is a bargain purchase option at the end of the lease

b. The lease transfers ownership at the end of the lease

c. The lease term is greater or equal to 75% of the economic life of the asset

d. The present value of lease payments is greater or equal to 90% of fair value of the asset.

Applying these criteria to see if the lease is a capital lease or an operating lease.

A. XYZ leased a copy machine for 3 years. The fair market value of the machine at the inception of the lease was $17,500 and XYZ agreed to pay a quarterly lease payment of $1,475. At the end of the lease the remaining life is estimated to be 2 years and XYZ has the option to purchase the copy machine for its then estimated fair market value of $5,000.

There is no bargain purchase option.

Lease life is 3/5 (at the end of lease there are still 2 years left and so asset life is 5 years)= 60% of asset life which is ................
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