Long-Term Notes Payable and Mortgages (pp. 297 –...

CHAPTER 8 SPECIAL ACQUISITIONS: FINANCING A BUSINESS WITH DEBT

Long-Term Notes Payable and Mortgages (pp. 297 – 301)

Using the example in the text, the journal entries to record the mortgage payments on the 3-year, $100,000 note are as follows:

Date Transaction Debit Credit 12/31/2001 Mortgage payable $30,803.35 Interest expense 8,000.00

Cash $38,803.35

To record the first principal and interest payment on the $100,000, 8%, 3-year note

12/31/2002 Mortgage payable $33,267.62 Interest expense 5,535.73

Cash $38,803.35

To record the second principal and interest payment on the $100,000, 8%, 3-year note

12/31/2002 Mortgage payable $35,929.03 Interest expense 2,874.32

Cash $38,803.35

To record the third principal and interest payment on the $100,000, 8%, 3-year note

Tompkins Corp. purchased a building on January 1 by signing a long-term, $600,000 mortgage with monthly payments of $5,500. The interest rate is 9% per year. Prepare the journal entry to record the first payment.

STUDY BREAK 8-1 (p. 301) SEE HOW YOU’RE DOING

Issuing Bonds Payable (p. 314) Getting the Money

The journal entries to record the sale of a 10-year, 11.5%, $1,000 bond when the market rate of interest is also 11.5% is as follows:

58

Date Transaction Debit Credit Cash $1,000

Bonds payable $1,000

To record the issue of a 10-year, $1,000, 11.5% bond

Paying the Bondholders

The journal entries to record the first interest payment of the 10-year, $1,000, 11.5% bond is:

Date Transaction Debit Credit 12/31/2004 Interest expense $115

Cash $115

To record the annual interest payment on the bond

Accounting for Bonds Payable

Calculating the Proceeds from Bonds Issued at a Premium (pp. 316-7) If the same bond ($1,000, 11.5 %) is issued when the market rate of interest is 10%, the journal entry to record the transaction is:

Date Transaction Debit Credit Cash $1,092.17

Bonds payable $1,000.00 Premium on bonds payable 92.17


Calculating the Proceeds from Bonds Issued at a Discount (pp. 317-8)

The journal entry to record the issue of the same bond when the market rate of interest is 12% is:

Date Transaction Debit Credit Cash $971.74 Discount on bonds payable 28.26

Bonds payable $1,000.00


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Amortizing Bond Discounts and Premiums: Effective Interest Method

Payment of Interest to Bondholders and Amortization of a Discount. (pp. 318-20)

The entry to record the first interest payment on the bond issued at a discount is as follows:

Date Transaction Debit Credit 12/31/2004 Interest expense $116.61 Cash $115.00 Discount on bonds payable 1.61

To record the annual discount amortization and cash interest payment

Try this example with semiannual interest payments. Just divide the annual interest rate by 2 and count the periods as the number of 6-month periods. Knollwood Corp. issued $200,000 of 6% per year, 20-year bonds at 98 on January 1, 2003. The market rate of interest was approximately 6.5%. Interest is paid on June 30 and December 31. The company uses the effective interest method of amortization. Prepare the journal entries to record the bond issue and the first two interest payments.


Payment of Interest to Bondholders and Amortization of a Premium.

The entry to record the first interest payment on the bond issued at a premium is as follows:

Date Transaction Debit Credit 12/31/2004 Interest expense $109.22 Premium on bonds payable 5.78

Cash $115.00

To record the annual premium amortization and cash interest payment

Wood Corp. issued $200,000 of 20-year, 10% interest bonds at 102 on January 1, 2003 when the market rate of interest was approximately 9%. Interest is paid annually on December 31. The company uses the effective interest method of amortization. Prepare the journal entries to record the bond issue and the first interest payment.


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Straight-Line Amortization of Bond Discounts and Premiums (pp. 322-34) The entry to record the interest payment on bonds issued at a premium using the straight-line method of amortization is as follows:

Date Transaction Debit Credit 12/31/2004 Interest expense $105.78 Premium on bonds payable 9.22

Cash $115.00

To record the annual premium amortization and cash interest payment.

Zero-Coupon Bonds (pp. 323-24) The entry to record the sale of the Biz Corporation zero-coupon bond is as follows:

Date Transaction Debit Credit Cash $385.54 Discount on bonds payable 614.46

Bonds payable $1,000.00

To record the sale of a 10% zero-coupon bond

At each interest payment date, the discount will be amortized based on the outstanding principal balance. For example, the interest due on the first annual payment date would be $38.55 ($385.54 x 10%) and the entry would be as follows:

Date Transaction Debit Credit Interest expense $38.55 Discount on bonds payable $38.55

To record the annual interest expense on a zero-coupon bond.

On January 1, 2003 Stanton Corp. issued $100,000 face value of 8% bonds to yield 10% (the market rate of interest = 10%). The bonds are dated January 1, 2003, call for annual interest payments on December 31, and mature on December 31, 2006. Stanton uses the effective interest method for amortizing discounts and premiums.

1. Calculate the selling price of the bonds and then round to the nearest whole percentage point to answer the rest of the questions.

2. Prepare the journal entry to record the bond issue.

3. Prepare the journal entry to record the first interest payment.

4. Prepare the journal entry to record the second interest payment.

STUDY BREAK 8-10 (p. 324) SUMMARY PROBLEM

61

Summary Problem: Tom's Wear Obtains Debt Financing in July Transaction 1 Tom borrows $75,000 for a new office complex (land and building).

Date Transaction Debit Credit 7/1/2001 Buildings $67,500

Lan C

M

d 7,500 urrent portion of mortgage payable $ 2,710 ortgage payable 72,290

To record the purchase of a building and land Transaction 2 Pays Sam Cubby's salary for June and deposits the related payroll taxes.

Date Transaction Debit Credit 7/2/2001 Salaries payable $723

PayOth

roll taxes withheld 277 er payables 77 Cash $1,077 To record payment of salary and taxes Transaction 3 Collects cash on accounts receivable of $37,000.

Date Transaction Debit Credit 7/10-7/30/01 Cash $37,000

Accounts receivable $37,000 To record the collection of accounts receivable Transaction 4 Pays accounts payable of $18,950.

Date Transaction Debit Credit 7/12/2001 Accounts payable $18,950

Cash $18,950 To record payment on account Transaction 5 Purchase 10,000 T-shirts @$3.60 each, FOB destination.

Date Transaction Debit Credit 7/14/2001 Inventory $36,000

Accounts payable $36,000 To record the purchase of 10,000 T-shirts at $3.60 each Transaction 6 Writes off Big Bend Sports $1,000 accounts receivable.

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Date Transaction Debit Credit 7/20/2001 Allowance for bad debts $1,000

Accounts receivable $1,000 To record the write off of Big Bend Sports' account

Transaction 7 Sells 500 shirts to 18 stores for $11 each. All sales are on account

Date Transaction Debit Credit 7/15-7/30/01 Sales revenue $44,000

Accounts receivable $44,000 To record the sale of 500 T-shirts on account

Cos

7/15-7/30/01 t of goods sold $32,735

Inventory $32,735 To record cost of goods sold Transaction 8 During July, 200 shirts are returned with defects. Tom replaces them all with new shirts

Date Transaction Debit Credit 7/15-7/30/01 Warranties payable $720

Inventory $720 To record the replacement of 200 defective shirts. Transaction 9 Other operating expenses for the month are $2,600.

Date Transaction Debit Credit 7/30/2001 Other operating expenses $2,600

Cash $2,600 To record the payment of misc. operating expenses Transaction 10 Records salary expense of $3,500.

Date Transaction Debit Credit 7/30/2001 Salary expense $3,500

Cash $3,500 To record the payment of payroll, related taxes and fees Transaction 11 Tom's Wear pays a dividend of $2,000.

Date Transaction Debit Credit 7/30/2001 Retained earnings $2,000

Cash $2,000 To record the payment of a cash dividend

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Adjustment 1 Record operating expenses: Rent- $1,200; Insurance - $100, Web service - $50.

Date Transaction Debit Credit 7/31/2001 Rent expense $1,200

Ins Oth

urance expense 100 er operating expenses 50 Prepaid rent $1,200 Prepaid insurance 100 Prepaid web service 50

To record July's operating expenses Adjustment 2 Record depreciation expense for June - $100 for the computer, $1,450 for the van (18,000 miles x $0.145) and $130 for the building ($62,400/40)/12.

Date Transaction Debit Credit 7/31/2001 Depreciation expense $1,680

Accum. dep. - Computer $ 100 Accum. dep. - Van 1,450

Accum. dep. - Building 130 To record July depreciation expense Adjustment 3 Record interest expense on the notes: Van - $250 ($30,000 x 10%)/12

Date Transaction Debit Credit

Mortgage - $500 ($75,000 x 8%)/12

/31/2001 $750 Interest payable

T n e for July Adjustment 4

te = 3% of credit sales. nsaction Debit Credit

Bad debt estima

Date Tra/31/2001 $2,970

Allowance for bad debts $2, 70 To record th bad debt s

9e e timate for July

Adjustment 5

ty estimate = 2% of total sales. n Debit Credit

Warranty liabili

Date Transactio/31/2001 $1,980

Warranties payable $1, 80 To record th mate w ly

9e esti d arranty liability for Ju

7 Interest expense $750

o record interest expe s

7 Bad debt expense

7 Warranty expense

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65

000 3 6 $1,000 $1,320 BB BB $6,365 $32,735 7 BB $150 $100 Adj-1000 6 2,970 5 36,000 720 8

0 503,290 8,910

200 Adj-1 BB $4,000 $400 BB BB $30,000 100 Adj-2

4,000 30,000500

$130 Adj-2 1 $7,500 4 $18,950 $18,950 BB36,000 5

7,50036,000

Salaries payable$277 BB 2 77 $77 BB 2 723 $723 BB 8 $720 $979 Adj-8

1,9800 0 0

2,239

ts for Tom's Wear with July journal entries and adjustments

Prepaid insurance

Equipment - Computer

Accum dep - Computer

ts le Inventory

Allowance for bad debts

ent Equipment - Van

Accounts payable

Other payables Warranties payable

Accum dep - buildings

xes d

Land

BB $8,3 37,

17,

BB

In

75

A

278 1,077 2 BB $44,100 $37,000 18,950 4 7 99,000 1,

2,600 93,500 10 105,1002,000 11

151

$200 $50 Adj-1 BB $1,800 $1,

150 600

$2,755 BB 1 $67,5001,450 Adj-2

67,5004,205

terest payable$750 BB 2 $277

0 Adj-3

1,500

T-Accoun

AccounreceivabCash

Prepaid rPrepaid web

service

Buildings

Payroll tawithhel

ccum dep - Van

$6,

9Adj-1

Adj-5

66

000 BB $2,710 BB $24,000 BB $72,290 BB

6,000 2,710 24,000 72,290

Retained earnings$5,000 BB 11 $2,000 $33,662 BB $99,000 7 7 $32,735 Adj-2 $1,680

5,000 31,662 99,000 32,735 1,680

$2,600 10 $3,500 Adj-1 $100 Adj-1 $1,200 Adj-3 $75050

3,500 100 1,200 7502,650

$2,970 Adj-5 $1,980

2,970 1,980

Bad debt expense Warranty expense

Misc. operating expenses

Current portion of mortgage payable

Salary expense

Common stock

Interest expense

Depreciation expense

Notes payable Mortgage payable

Cost of goods sold

Rent expenseInsurance expense

Sales revenue

Current portion of notes payable

Tom's Wear, Inc. Adjusted Trial Balance

July 31, 2001

Debits Credits

Cash $17,151 Accounts receivable 105,100 Allowance for bad debts $3,290 Inventory 8,910 Prepaid insurance 50 Prepaid Web service 150 Prepaid rent 600 Equipment - Computer 4,000

Accumulated depreciation - Computer 500

Equipment - Van 30,000

Accumulated depreciation - Van 4,205

Buildings 67,500

Accumulated depreciation - Buildings 130

Land 7,500 Accounts payable 36,000 Interest payable 1,500 Warranties payable 2,239

Current portion of notes payable 6,000

Current portion of mortgage payable 2,710

Notes payable 24,000 Mortgage payable 72,290 Common stock 5,000 Retained earnings 31,662 Revenue 99,000 Cost of goods sold 32,735 Depreciation expense 1,680 Misc. operating expense 2,650 Salary expense 3,500 Insurance expense 100 Rent expense 1,200 Interest expense 750 Bad debt expense 2,970 Warranty expense 1,980 Totals $288,526 $288,526

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ournal E r Study BreaJ ntries fo k Questions

Date Transaction $1,0

T the first principal and inter y e $600 00, 9% n te

Cash 196,000 Discount o 4,000

Bonds payabl

T the issue of

Interest expense $6,000

Discount on ble

T the first sem ym 1 3 Interest expense Cash $6,000 Discount o 382

T the second semi-annual in p

Credi Cash Bonds pa $200,00

Premiu 4,00

T the issue o 1 3 Interest expense $18,3 0 Premium on bonds pay 1,6 0 Cash

T the first annual inter onds

Debit Credit Study Break 8-1

2/1 Mortgage payable 00 Interest expense 4,500

Cash $5,500

o record est pa ment on th ,0 o

Date Transaction Debit Credit Study Break 8-8 1/1/2003 $

n bonds payable e $200,000

o record $200,000, 6% bonds at 98

6/30/2003 $6,370 Cash

bonds paya 370

o record i-annual interest pa ent on bonds

2/31/200 $6,382

n bonds payable

o record terest ayment on bonds

Date Transaction Debit t Study Break 8-9 1/1/2003 $204,000

yable 0 m on bonds payable 0

o record f $200,000, 6% bonds at 98

2/31/200 6 able 4

$20,000

o record est payment on b

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Date Transaction Debit Credit Study Break 8- 10 1/1/2003 Cash $94,000

D nt Bonds payable 100,000

issue of $100,000, at 94 6/30/2 In t expen Cash $8,000 D a

nual interest pa nds

/200 Interest expense $9,540 Cash $8,000 Discount on bonds payable

T s a

hort Exercises

E8-3 Curta1.986.91. Gi

n Company borroe the journal entry

at 9% for 7 yym

E8-8 $100,000 of 8% bonds are issued (sold) fo o tive y

iscou on bonds payable 6,000

$

To record the 10% bonds

003 teres se $9,400

iscount on bonds pay ble 1,400

To record the first an yment on bo 12/31 3

1,540

o record the econd nnual interest payment on bonds

S

S i wed $10,000 ears. The loan requires annual payments of $ v to record the first annual pa ent.

Date Account Debit Credit

S r $95,000, t result in an effec ield of 9%. Give the journal entry to record the first annual interest payment.


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SE8 or each of ive the jour y to record d issu

m r ystems issued $20,00 nds at 106. rlichm 0,00 bonds at 99. Carl's Cutlery C $500,0 0 worth of bond

Transaction Account Debit Credit

-10 F the following, g nal entr the bon e.

Halde an Hai S 0 worth of boE an Egg Company issued $10 0 worth of

ompany issued 0 s at 96 ½.

SE8-11 Altoona Company was able to issue (sell) $200,000 of 9% bond 20,000 e their credit rating is excellent and market interest rates have fallen. The resulting effective yield on these bonds is 8%. Give the journal entry to record the first annual interest pa ent.

ate Account

s for $2 , becaus

ym

D Debit Credit

Exercises

E8-5 On December 31, 2000, Bert's Batteries, Inc. issued $10,000 worth of 10% bonds at 94. The market rate of interest the time of issue was approximately 11%. These are 10-year bonds with interest paid annually on December 31. The company uses the effective interest method to amortize bond premium d discounts. Give the journal entries to record the first two interest payments.

at

s an

70


w niad prem

em

E8-8 On June 30, 2003, Ellie's Electronics issued $20,000 face value of 10% bonds at 105. The market rate of interest at the time of issue was approximately 9%. They ere 10-year bo ds with interest paid sem nnually, on D cember 31 and June 30. The company uses the effective interest method to amortize bon iums and discounts. Give the journal entries for the first three interest pay ents.


1 h owefor the first four interest dian

E8-11 On January , 2004, John's Electronics issued $10,000 wort f 10% bonds at 96. The market rate of interest at the time of issue was approximately 10.66%. They re 10-year bonds with interest paid sem nually. Give the journal entries for the interest payments ates. John's Electronics uses the effective interest method for amortizing any bond discounts or premiums.

Account Debit Credit Date

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Problems – Set A

P8-1A The SD Company engaged in the following transactions related to long-term liabilities during 200

1. On March 1, borrowed $25,000 for a machine. The loan is to be repaid in equal annual pa ents at the end of each of the next five years (beginning Febr 28, 2004; and the interest rate SD is paying for this loan is 8.5%.

2. On October 1, borrowed $120,000 from Suwann e Local Bank at an interest rate of 7.25%. The loan is for 10 years, and SD Com will make nnual payments on September 30 of each year.

Required: For each loan described, give the journal entries for the first two interest payments.

ransaction Account Debit

3.

ym uary

epany a

T Credit

1

2

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Transaction Ac count Debit Credit

Corporation issued $100,0

. man us

2

P8-7A Newman 00 of bonds on January 1, 2002. The bonds mature on January 1, 2012. Interest is payable annually on December 31. The stated rate of interest is 8%, and the market rate of interest was 10% at the time of issue.

Required: a. Calculate the proceeds for the bond issue. Give the journal entry to record the issue of the

bondsb. Give the journal entries to record the first two interest payments. New es the effective

interest method for amortizing discounts and premiums. c. Assume, instead, that Newman uses the straight-line method for amortizing discounts and

the journal entries to record the first two interest payments. premiums. Give

Transaction Account Debit Credit

a.

. b

c.

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Long-Term Notes Payable and Mortgages (pp. 297 –...

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