P14-3 Premium Amortization Schedule with Retirement …



P14-3 Premium Amortization Schedule with Retirement Before Maturity The Dorset Corporation issued $600,000 of 13% bonds on January 1, 2009 for $614, 752.24. They are due December 31, 2011,were issued to yield 12%, and pay interest semiannually on June 30 and December 31. The company uses the effective interest method. 1. Prepare a bond interest expense and premium amortization schedule. 2. Assume the company retired the bonds on September 30, 2011 for $630,000, which includes accrued interest. Prepare the journal entry to record the bonds retirement.

P14-9 Bonds with Detachable Warrants On January 1, 2010, the London Corporation issued $500,000 of 11.5% bonds due January 1, 2020, at 102. The bonds pay interest semiannually on June 30 and December 31. Each $1,000 bond 20 warrants, and the exchange of two warrants allowed the holder to acquire one share of $10 par common stock for $50. Shortly after the time of issue, the bonds were quoted at 98 ex rights and each individual warrant was quoted at $5. Subsequently, on March 31, 2010, 8,000 rights were exercised. 1. Prepare the journal entry to record the bond issue. 2. Prepare the journal entries on March 31, 2010 to record the exchange of the warrants for common shares.

P14-12 Notes receivable On January 1, 2010, the Somerville Corporation sold a used truck to the Cornelius Company and accepted a $28,000 non-interest-bearing note due January 1, 2013. Somerville carried the truck on its books at a cost of $30,000 and a current book value of $23,000. Neither the fair value of the truck nor the note was available at the time of the sale; however, Cornelius’s incremental borrowing rate was 12%. 1. Prepare the journal entries on Somerville’s books to record: a. The sale of the truck b. The related adjusting entries on December 31, 2010, 2011, and 2012 c. The collection of the note on January 1, 2013 2. Prepare the notes receivable portion of Somerville’s December 31, 2010, 2011, and 2012 balance sheets.

E15-4 Available-for-Sale Securities At the beginning of 2010, Ace Company had the following portfolio of investments in available-for-sale securities (common stock): 12/31/09 Security Cost Fair Value A $20,000 $25,000 B 30,000 29,000 Totals $50,000 $54,000 During 2010 the following transactions occurred: May 3 Purchased C securities (common stock) for $13,500 July 16 Sold all of the A securities for $25,000 Dec. 31 received dividends of $800 on the B and C securities, for which the following information was available: 12/31/10 Security Fair Value B $32,000 C 15,000 1. Prepare journal entries to record the preceding information. 2. What is the balance in the unrealized Increase/Decrease account on December 31, 2010?

E15-8 Purchase, Discount Amortization, and sale of Bond Investment On November 1, 2009, the Reid Corporation acquired bonds with a face value of $700,000 for $673,618.61. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest semiannually on April 30 and October 31, were purchased to be held to maturity, and are due October 31, 2014. On November 1, 2010, in contemplation of a major acquisition, the bonds were sold for $700,000. Reid Corporation is on a fiscal year accounting period ending October 31. The company uses the effective interest method. Prepare journal entries to record the purchase of the bonds, the interest receipts on April 30, 2010 and October 31, 2010, and the sales of the bonds. P15-18 Change to Equity Method On January 1, 2010, Lion Company paid $600,000 for 10,000 shares of Wolf Company’s voting common stock, which was a 10% interest in Wolf. Lion does not have the ability to exercise significant influence over the operating and financial policies of Wolf. Lion received dividends of $1.00 per share from Wolf on October 2, 2010. Wolf reported net income of $400,000 for the year ended December 31, 2010, and the ending market price of its shares was $63. On July 2, 2011 Lion paid $1,950,000 for 30,000 additional shares of Wolf Company’s voting common stock, which represents a 30% investment in Wolf. The fair values of all of Wolf’s assets, net of liabilities, were equal to their book values of $6,500,000. As a result of this transaction, Lion has the ability to exercise significant influence over the operating and financial policies of Wolf. Lion received dividends of $1.00 per share from Wolf on April 2, 2011, and $1.35 per share on October 1, 2011. Wolf reported net income of $500,000 for the year endeded December 31, 2011, and $200,000 for the six months ended December 31, 2011. 1. For the Lion Company show the dividend revenue for 2010, as well as the December 31, 2010 unrealized increase in value of available-for-sale securities and carrying value of the investment account. 2. Assuming that Lion Company issues comparative financial statement for 2010 and 2011, show the investment income for 2010 and 2011, as well as the December 31, 2010 and 2011 carrying value of the investment account.

P14-3)

1. DORSETT CORPORATION

Bond Interest Expense and

Premium Amortization Schedule

Effective Interest Method

13% Bonds Sold to Yield 12%

| | | |Interest |Unamortized | |

| | |Cash |Expense |Premium |Book Value |

| |Date |Credita |Debitb |Debitc |of Bondsd |

| |01/01/09 | | | |$614,752.24 |

| |06/30/09 |$39,000 |$36,885.13 |$2,114.87 |612,637.37 |

| |12/31/09 |39,000 |36,758.24 |2,241.76 |610,395.61 |

| |06/30/10 |39,000 |36,623.74 |2,376.26 |608,019.35 |

| |12/31/10 |39,000 |36,481.16 |2,518.84 |605,500.51 |

| |06/30/11 |39,000 |36,330.03 |2,669.97 |602,830.54 |

| |12/31/11 |39,000 |36,169.46 |2,830.54 |600,000.00 |

a$600,000 x 0.13 x ½ year

bPrevious book value x 0.12 x ½ year

c$39,000 - amount from footnote b

dPrevious book value - amount from footnote c

eDifference due to $0.37 rounding error

2. 2011

Sept. 30 Interest Expense ($36,169.46 x 3/6) 18,084.73

Premium on Bonds Payable 1,415.27

Interest Payable ($39,000 x 3/6) 19,500.00

Sept. 30 Bonds Payable 600,000.00

Premium on Bonds Payable

($2,830.54 - $1,415.27) 1,415.27

Interest Payable 19,500.00

Loss on Bond Retirement 9,084.73*

Cash 630,000.00

*$610,500 Retirement price -

$601,415.27 Book value

P14-9)

1. 2010

Jan. 1 Cash ($500,000 x 1.02) 510,000.00

Discount on Bonds Payable 37,222.22

Bonds Payable 500,000.00

Common Stock Warrants 47,222.22

Amount assigned to bonds = [pic]x $510,000

= $462,777.78

Amount assigned to warrants = [pic]x $510,000

= $47,222.22

Value of stock warrants = [pic] = $4.72 per warrant

2. 2010

Mar. 31 Cash [(8,000 ( 2) x $50] 200,000

Common Stock Warrants

($4.72 x 8,000) 37,760

Common Stock [$10 x (8,000 ( 2)] 40,000

Additional Paid-in Capital on

Common Stock 97,760

P14-12)

1. a. 2010

Jan. 1 Note Receivable 28,000.00

Accumulated Depreciation

($30,000 - $23,000 book value) 7,000.00

Loss on Sale of Truck 3,070.16a

Discount on Note Receivable 8,070.16b

Truck 30,000.00

a$23,000 book value of truck - $19,929.84 present value of note*

*Present value of note: $28,000 x Factor for n=3, i=0.12 from Table 3

of the TVM Module; $28,000 x 0.711780 = $19,929.84

b$28,000 face value - $19,929.84 present value

b. 2010

Dec. 31 Discount on Note Receivable 2,391.58

Interest Revenue

($19,929.84 x 0.12) 2,391.58

2011

Dec. 31 Discount on Note Receivable 2,678.57

Interest Revenue [($19,929.84 +

$2,391.58) x 0.12] 2,678.57

2012

Dec. 31 Discount on Note Receivable 3,000.01

Interest Revenue [($19,929.84 +

$2,391.58 + $2,678.57) x 0.12] 3,000.01c

c$0.01 rounding difference

1. (continued)

c. 2012

Jan. 1 Cash 28,000.00

Note Receivable 28,000.00

2. SOMERVILLE CORPORATION

Balance Sheet (partial)

December 31, 2010, 2011, and 2012

12/31/2010 12/31/2011 12/31/2012

Notes receivable $28,000.00 $28,000.00 $28,000.00

Less: Discount on notes receivable (5,678.58) (3,000.01) —       

$22,321.42 $24,999.99 $28,000.00

E15-4)

1. 2010

May 3 Investment in Available-for-Sale

Securities 13,500

Cash 13,500

July 16 Cash 25,000

Investment in Available-for-Sale

Securities 20,000

Gain on Sale of Available-for-Sale

Securities ($25,000 - $20,000) 5,000

16 Unrealized Increase/Decrease in

Value of Available-for-Sale

Securities ($25,000 - $20,000) 5,000

Allowance for Change in Value

of Investment 5,000

Dec. 31 Cash 800

Dividend Revenue 800

31 Allowance for Change in Value

of Investment 5,000*

Unrealized Increase/Decrease in

Value of Available-for-Sale

Securities 5,000

Cumulative

12/31/10 Change in

*Security Cost Fair Value Fair Value

B Company common stock $30,000 $32,000 $2,000

C Company common stock 13,500 15,500 2,000

Totals $43,500 $47,500 $4,000

$5,000 debit adjustment = $4,000 required ending debit balance + $5,000

credit adjustment (7/16/10) - $4,000 beginning

debit balance

2. $4,000 credit balance [$4,000 beginning credit balance - $5,000 debit

adjustment (7/16/10) + $5,000 ending credit

adjustment]

E15-8)

2009

Nov. 1 Investment in Held-to-Maturity

Debt Securities 673,618.61

Cash 673,618.61

REID CORPORATION

Bond Investment Interest Revenue

and Discount Amortization Schedule (Partial)

Effective Interest Method

| | | | |Investment in |Carrying Value |

| | |Cash |Interest Revenue |Debt Securities |of Debt |

| |Date |Debita |Creditb |Debitc |Securitiesd |

| |11/01/09 | | | | $673,618.61 |

| |04/30/10 |$35,000 |$37,049.02 |$2,049.02 |675,667.63 |

| |10/31/10 |35,000 |37,161.72 |2,161.72 |677,829.35 |

a$700,000 x 0.10 x ½

bPrevious carrying value x 0.11 x ½

cAmount from footnote b - amount from footnote a

dPrevious carrying value + amount from footnote c

2010

Apr. 30 Cash 35,000.00

Investment in Held-to-Maturity

Debt Securities 2,049.02

Interest Revenue 37,049.02

Oct. 31 Cash 35,000.00

Investment in Held-to-Maturity

Debt Securities 2,161.72

Interest Revenue 37,161.72

Nov. 1 Cash 700,000.00

Investment in Held-to-Maturity

Debt Securities (from schedule) 677,829.35

Gain on Sale of Debt Securities 22,170.65

P15-18)

1. $10,000 dividend revenue for 2010 (10,000 shares x $1.00)

$30,000 12/31/10 unrealized increase in value of available-for-sale securities [10,000 x ($63 - $60)]

$630,000 12/31/10 carrying value of investment (10,000 shares x $63 market price)

2. $40,000 investment income for 2010 ($400,000 net income x 0.10 ownership)

$110,000 investment income for 2011 [($300,000 x 0.10) + ($200,000 x 0.40)]

$2,626,000 12/31/11 carrying value ($630,000a + $1,950,000 cost + $80,000 investment income for second half of 2011 - $54,000 dividends (40,000 x $1.35; 10/1/11)]

a$1,950,000 ( 30,000 shares = $65, $65 x 10,000 = $650,000

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