Question

760 Chapter 14 Long-Term Liabilities Amortization Schedule Carrying Amount Year Cash Interest Unamortized Value $94,349 $5,651 5,329 11,000 $11,322 2011 2012 2013 2014 95,032 95,436 95,888 96,395 96,962 97,597 11,000 4,564 4,112 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,452 11,507 11,567 11,635 11,712 11,797 11,894 3,038 2018 2019 99,106 100,000 894 (a) Indicate whether the bonds were issued at a premium or a discount and how you can determine th schedule. (b) Indicate whether the amortization schedule is based on the straight-line method or the how you can determine which method is used. effective-inter (c) Determine the stated interest rate and the effective-interest rate. (d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on Je (e) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions (0) 2011. (Interest is paid January 1.) On the basis of the schedule above, prepare the jounal entry or entries to reflect the bond transaction 2018. Capulet Corporation does not use reversing entries 2 P14-2 (L01,2) EXCEL (Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey $2,500,000. It received a downpayment of $500,000 from local businesses to support the project, and now $2.000,000 to complete the p yect. It there fore decides to issue S2 000 000 of 10.5%, 10-year bonds. These bon January 1, 2016, and pay interest annually on each January 1. The bonds yield 10% Instructions Prepare the journal entry to record the issuance of the bonds on January 1, 2016. (b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-inter () Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plu (a) Prepare the journal entry to record this redemption. P14-3 (L01,3) (Negative Amortization) Good-Deal Inc. developed a new sales gimmick to help sell it automobiles. Because many new car buyers need financing. Good-Deal offered a low downpayment and lo On lanuary 1, 2017, a customer purchased a new $33,000 automobile, making a downpayment of $1 that the annual rate of interest would be 8% and that quarterly payments wou the first year after purchase. It believes that this promotion will bring in some new buyers. signed a note indicating 2018. After this one-yea as of January 1, 2020 Instructions For the first year, Good-Deal required a $400 quarterly payment to be made on April i, July 1, Octot r period, the customer was required to make regular quarterly payments that wo (a) Prepare a note amortization schedule for the first year (b) Indicate the amount the customer owes on the contract at the end of the first (e) Compute the amount of the new quarterly payments. (d) Prepare a note amortization schedule for these new payments for the next 2 (e) What do you think of the new sales promotion used by Good-Dgal?

Answer 1

P 14-2

(a)
	Present value of the principal = $2,000,000 X 0.38554 =
	(PV of $1 for 10 periods at 10%) = $578,310
	Present value of principal formula =	771086.5789
	Present value of the interest = $210,000 X 6.14457 =
	(PV of a $1 anuity for 10 periods at 10%) = $967,770
	Present value of interest formula =	1290359.092
	Present selling value of the bonds =	2061445.671
01-01-16	Cash	2011446
	Unamortized Bond Issue Costs	50000
	Bonds Payable		2000000
	Premium Bonds Payable		61446
(b)
Date	Interest Paid	Interest Expense	Premium Amortization	Bond Carrying Value
01-01-16				2,061,446
01-01-17	210,000	206,145	3,855	2,057,590
01-01-18	210,000	205,759	4,241	2,053,349
01-01-19	210,000	205,335	4,665	2,048,684
01-01-20	210,000	204,868	5,132	2,043,553
c)	1,065,000
Resolve value of unamortized bond issue costs for the bonds being retired.
	Unamortized bond issue costs	50000
	Years of bond issue	10
	Unamortized bond issue costs per year	5000
	Unamortized bond issue costs per six months	2500
	Six month periods to July 1, 2012	7
	Unamortized bond issue costs to July 1, 2012	17500
	Remaining unamortorized bond issue costs as of July 1, 2012	32500
	Bonds retired as a percentage of bonds issued	0.5
	Value of remaining unamortized bond issue costs to retired bonds	16250
Hint: Resolve carrying value of the bonds being retired.
	Date	Interest Paid	Interest Expense	Premium Amortization	Bond Carrying Value
	01-01-16				2061446
	01-01-17	210000	206145	3855	2057590
	01-01-18	210000	205759	4241	2053349
	01-01-19	210000	205335	4665	2048684
	Percentage of bonds to be retired in the year				50%
	Carrying value on Jan 1, 2019 of the bonds to be retired				1024342
	Interest on bonds to be retired as of July 1, 2019
	01-07-19	52500	51217	1283	1023059
	Reacquisition price	1065000
	Carrying value as of July 1, 2019	1023059
		41941
	Unamortized bond issue costs	16250
	Loss	58191
	Entry for accrued interest
	Interest Expense [1,024,342 * 10.00% * (6/12)]	51217
	Premium on Bonds Payable	1283
	Cash [$1,000,000*10.50%*(6/12)]		52500
	Entry for reacquisition
	Bonds Payable ($2,000,000 * 50%)	1000000
	Premium on Bonds Payable	23059
	Loss on Redemption of Bonds	58191
	Unamortized Bond Issue Costs		16250
	Cash		1065000
	The loss is reported as an ordinary loss.