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CHAPTER 14
Financing Liabilities: Bonds and LT Notes Payable

SOLUTIONS TO EXERCISES

E14-1 Determining the Proceeds from Bond Issues.

Madison Corporation is authorized to issue $500,000 of 5-year bonds dated June 30, 2016, with a stated rate of interest of 11%. Interest on the bonds is payable semiannually, and the bonds are sold on June 30, 2016.

Required: Determine the proceeds that the company will receive if it sells (1) the bonds to yield 12% and (2) the bonds to yield 10%.

1. (Factors from Tables 3 and 4 of the TVM Module)

n = 10, i = 0.06

PV of Principal ($500,000 0.558395) = $279,179.50

PV of Interest + ($27,500 7.360087) = 202,402.39

$481,581.89

OMIT 2. (Factors from Tables 3 and 4 of the TVM Module)

n = 10, i = 0.05

PV of Principal ($500,000 0.613913) = $306,956.50

PV of Interest + ($27,500 7.721735) = 212,347.71

$519,304.21

E14-3 Recording Bond Issue and Interest Payments Burris Corporation is authorized to issue $800,000 of 9% bonds. Interest on the bonds is payable semiannually; the bonds are dated January 1, 2016, and are due December 31, 2020.
Required: Prepare the journal entries to record the following:

a.

April 1, 2016

Sold the bonds at par (100) plus accrued interest

b.

June 30, 2016

First interest payment

c.

December 31, 2016

Second interest payment

2016

a. Apr. 1 Cash 818,000

Interest Expense ($800,000 0.09 3/12)* 18,000

Bonds Payable 800,000

*Alternatively, Interest Payable could be credited.

b. June 30 Interest Expense ($800,000 0.09 6/12)* 36,000

Cash 36,000

*Alternatively, if Interest Payable was credited on April 1, 2016, Interest Expense would be debited for $18,000, and Interest Payable would be debited for $18,000.

c. Dec. 31 Interest Expense ($800,000 0.09 6/12) 36,000

Cash 36,000

E14-5 Straight-Line Premium Amortization On January 1, 2016, Hackman Corporation issued $1 million face value 12% bonds dated January 1, 2016, for $1,023,000. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2020. Hackman uses the straight-line amortization method.

Required: Record the issuance of the bonds and the first two interest payments.

2016

Jan. 1 Cash 1,023,000

Bonds Payable 1,000,000

Premium on Bonds Payable 23,000

June 30 Interest Expense 57,700

Premium on Bonds Payable [($23,000

60 months) 6 months] 2,300

Cash ($1,000,000 0.12 6/12) 60,000

Dec. 31 Interest Expense 57,700

Premium on Bonds Payable [($23,000

60 months) 6 months] 2,300

Cash ($1,000,000 0.12 6/12) 60,000

OMIT E14-6 Straight-Line Discount Amortization Bryan Company issued $500,000 of 10% face value bonds on January 1, 2016, for $486,000. The bonds are due December 31, 2018, and pay interest semiannually on June 30 and December 31. Bryan uses the straight-line amortization method.
Required: Prepare the journal entries to record the issuance of the bonds and the first two interest payments.

2016

Jan. 1 Cash 486,000

Discount on Bonds Payable 14,000

Bonds Payable 500,000

June 30 Interest Expense 27,333.33

and Discount on Bonds Payable [($14,000

Dec. 31 36 months) 6 months] 2,333.33

Cash ($500,000 0.10 6/12) 25,000.00

E14-7 Effective Interest Discount Amortization Chowan Corporation issued $100,000 of 10% bonds dated January 1, 2016, for $96,832.72 on January 1, 2016. The bonds are due December 31, 2019, were issued to yield 11%, and pay interest semiannually on June 30 and December 31. Chowan uses the effective interest method of amortization.
Required: Prepare the journal entries to record the issue of the bonds on Jan. 1, 2016, and the interest payments on June 30, 2016, Dec. 31, 2016, and June 30, 2017. In addition, prepare an amortization schedule for the bonds through June 30, 2017.

2016

Jan. 1 Cash 96,832.72

Discount on Bonds Payable 3,167.28

Bonds Payable 100,000.00

CHOWAN CORPORATION

Bond Interest Expense and

Discount Amortization Schedule (Partial)

Effective Interest Method

10% Bonds Sold to Yield 11%

Interest Unamortized