Question

PART III- COMPUTATIONS (16 points) 1. On January 1, 2010, Kentwood Company issued bonds with a face value of $800.000. The bonds carry a stated interest of 7% payable each January 1 and July 1 Achievemenn Test 8 AT8-5 Instructions a. Prepare the journal entry for the issuance assuming the bonds are issued at 97 b. Prepare the journal entry for the issuance assuming the bonds are issued at 102 2. Franco Corporation reports the following selected financial statement information at December 31, 2010: Total Assets $110,000 65,000 18,000 1,600 900 300 Total Liabilities Net Income Interest Income Interest Expense Tax Expense Instructions Calculate the debt to total assets and times interest earned ratios. 3. Adcock Company issued $600,000 face value, eight-year, 9% bonds on January 1, 2010 for $510,552. The bonds pay interest annually on January 1 and the effective interest rate is 12%. All of the bonds were called and redeemed on January 1,2011, for $570,000. Assume that the discount on bonds payable is amortized using the straight-line method. When the bonds are redeemed, gain / loss of $ (circle one) Adcock should record a 4. Vinson Corporation issued $600,000 face value, ten-year, 10% bonds on January 1, 2010, for $680,520. The bonds pay interest annually on January 1 and the effective interest rate is 8%. Assuming that the premium on bonds payable is amortized using the straight-line method Vinson should report premium on bonds payable on its December 31, 2010, balance sheet of

Answer 1

1		Here we assume that the face value of bond is 100
		So, bonds unit= 800000/100= 8000
		When bonds are issued at 97
	i		Dr.	Cr.
			Amount(in $)	Amount(in $)
	1.1.2010	Cash/Bank A/c -----------------------Dr. Discount on bonds payable A/c---Dr.                      To, Bonds Payable A/c (Being bonds issued at 97 with a discount of 3)	776000 24000	800,000
	1.7.2010	Interest Expense A/c------------------Dr.                       To, Bonds Payable A/c (Being interest payable @ 7% for 6 months on Fv of bonds)	28,000	28,000
	ii	When bonds are issued at 102
	1.1.2010	Cash/Bank A/c------------------------Dr.                        To, Premium on bonds issues                         To, Bonds payable A/c (being bonds issue at a premium of $2 )	800000 16000	816,000
	1.7.2010	Interest Expense A/c------------------Dr.                       To, Bonds Payable A/c (Being interest payable @ 7% for 6 months on Fv of bonds)	28,000	28,000
	2	The debt-to-total assets ratio is calculated as total liabilities divided by total assets,…
		Total assets	110,000
		Total Liability	65,000
		Debt to total assets ratio= $65000/$110000	0.59
		This interprets that company's assets are sufficient to pay company liabilites.
		The times interest earned ratio is calculated by dividing income before
		interest and income taxes by the interest expense.	Amount in $
		Net Income	18,000
		Add: Interest expense	900
		Add:Tax expense	300
		Income before interest and taxes	19,200
		Times interest earned ratio= 19200/900	21.33
		It means that franco corporations income is 21.3 times greater than its annual interest expense. Business is less risky .
			Amount in $
	3	Face Value	600,000
		Issue price	510,552
		Bonds payable	600,000
		Less : Discount	89,448
		Carrying value of bonds(Since the entire amount has been amortised	510,552
		Cash paid to retire bonds	570,000
		Loss on Early redemption	(59,448)
	4	Issue price	680,520
		face value	600,000
		Premium on bonds issued	80,520
		amortised premium= 80520/10	8,052
		on 31.12.2010 vision limited should report $80,520-$8,052=$72,468 in balance sheet