Examples of boundary crossing in counseling

Dec. 31 Interest Expense 5,136.16

Premium on Bonds Payable 863.84

Cash 6,000.00

E14-13 Redemption of Bonds Prior to Maturity Hill Corporation issued $1,500,000 of 11% bonds at 98 on January 2, 2014. Interest is paid semiannually on June 30 and December 31. The bonds had a 10-year life from the date of issue, and the company uses the straight-line method of amortization. On March 31, 2017, Hill recalls the bonds at the call price of 107 plus accrued interest.
Required: Prepare the journal entries to record the reacquisition (recall) of Hill's bonds.

2017

Mar. 31 Interest Expense 42,000

Discount on Bonds Payable ($250* 3 months) 750

Interest Payable ($1,500,000 0.11 3/12) 41,250

*$1,500,000 0.98 = $1,470,000 $ 1,500,000

(1,470,000)

$ 30,000 discount

$30,000 discount

120 months

= $250 discount amortization per month

31 Bonds Payable 1,500,000

Loss on Bond Redemptiona 125,250

Interest Payable 41,250

Discount on Bonds Payable 20,250

Cash [($1,500,000 1.07) + $41,250] 1,646,250

aCall price ($1,500,000 1.07) $ 1,605,000

Less: Face value $1,500,000

Unamortized discount (20,250)b (1,479,750)

Loss on bond redemption $ 125,250

bMarch 31, 2017 $250 39 lapsed months = $9,750 previously amortized discount

$30,000 Total discount to be amortized

(9,750) Previously amortized discount

$20,250 Unamortized discount

E14-23 Long-Term Notes Payable On January 1, 2016, Johnson Corporation issued a 2-year note due December 31, 2017, with a face value of $10,000, receiving $7,694.68 in exchange.
Required: Prepare the journal entries to account for the note: 1. on the date the note is issued, 2. at the end of 2016, 3. at the end of 2017.

1. 2016

Jan. 1 Cash 7,694.68

Discount on Notes Payable 2,305.32

Notes Payable 10,000.00

2. 2016

Dec. 31 Interest Expense ($7,694.68 0.14*) 1,077.26

Discount on Notes Payable 1,077.26

*$7,694.68 = $10,000 PV factor (n = 2, i = ?)

0.769468 = PV factor (n = 2, i = ?)

i = 14%, from Table 3 of the TVM Module

3. 2017

Dec. 31 Notes Payable 10,000.00

Interest Expense 1,228.06

Discount on Notes Payable

[($7,694.68 + $1,077.26) 0.14] 1,228.06*

Cash 10,000.00

*Difference of $0.01 due to rounding

OMIT E14-25 Exchange of a Note Payable for an Asset Webb Corporation purchased an asset from Shaw Corporation on January 1, 2016. Shaw accepted a 3-year, non-interest-bearing note of $18,000 due December 31, 2018, in exchange for the asset. Neither the fair value of the asset nor that of the note is available. Webb's incremental borrowing rate is 12%.
Required: Prepare the journal entries to record the issuance of the note, retirement, and any interest expense on the books of Webb on each of the following dates:

1. January 1, 2016

2. December 31, 2016

3. December 31, 2017

4. December 31, 2018

1. 2016

Jan. 1 Asset ($18,000 0.711780*) 12,812.04

Discount on Notes Payable 5,187.96

Notes Payable 18,000.00

*Factor for n = 3, i = 0.12 from Table 3 of the TVM Module

2. 2016

Dec. 31 Interest Expense 1,537.44

Discount on Notes Payable

($12,812.04 0.12) 1,537.44

3. 2017

Dec. 31 Interest Expense 1,721.94

Discount on Notes Payable

[($12,812.04 + $1,537.44) 0.12] 1,721.94