PROBLEMS

Pr. 14-129—Bond discount amortization.

On June 1, 2009, Everly Bottle Company sold $400,000 in long-term bonds for $351,040. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.

Instructions(a) Construct a bond amortization table for this problem to indicate the amount of interest

expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.)

(b) The sales price of $351,040 was determined from present value tables. Specifically explain how one would determine the price using present value tables.

(c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2011. (Round to the nearest dollar.)

Pr. 14-130—Bond interest and discount amortization.

Grove Corporation issued $800,000 of 8% bonds on October 1, 2010, due on October 1, 2015. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31.

Instructions(a) Complete the following amortization schedule for the dates indicated. (Round all answers to

the nearest dollar.) Use the effective-interest method.

Cash Interest Discount Carrying AmountPaid Expense Amortized of Bonds

October 1, 2010 $738,224April 1, 2011October 1, 2011

(b) Prepare the adjusting entry for December 31, 2011. Use the effective-interest method.

(c) Compute the interest expense to be reported in the income statement for the year ended December 31, 2011.

Pr. 14-131—Entries for bonds payable.

Its books on December 31.

Holden Co. sells $300,000 of 10% bonds on March 1, 2010. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2013. The bonds yield 12%, selling for $283,250. Give entries through March 1, 2011.

Pr. 14-132—Comprehensive bond problem.

Non-Current Liabilities

Titania Co. sells $600,000 of 12% bonds on June 1, 2010. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2014. The bonds yield 10%, selling for $638,780. On October 1, 2011, Titania buys back $300,000 worth of bonds for $315,000 (include accrued interest). Give entries through October 1, 2012.

Instructions(Round to the nearest dollar.)

Prepare all of the relevant journal entries from the time of sale until the date indicated. Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Pr. 14-133—Modification of Note under Different Circumstances.

Freeze Corporation is having financial difficulty and therefore has asked Manhattan National Bank to restructure its $3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

Prepare below are three independent situations. Prepare the journal entry that Halvor would make for each of these restructurings.

(a) Manhattan National Bank agrees to take an equity interest in Halvor by accepting ordinary shares valued at $2,200,000 in exchange for relinquishment its claim on this note. The ordinary shares have a par value of $1,000,000.

(b) Manhattan National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.

(c) Manhattan National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay interest on the note over the3-year period.

Pr. 14-134—Settlement of debt.

Ludwig, Inc., which owes Giffin Co. $800,000 in notes payable, is in financial difficulty. To eliminate the debt, Giffin agrees to accept from Ludwig land having a fair value of $610,000 and a recorded cost of $450,000.

Instructions(a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land.

(b) Compute the amount of gain or loss to Ludwig, Inc. on the settlement of the debt.

(c) Prepare the journal entry on Ludwig 's books to record the settlement of this debt.

14 - 2