questions
9-41 Q. No. 1 On December 31, 2000, Alaska Fisheries, Inc . issued $ 16 million of 10-year, 10% debentures at par ( face value)
Required:
1. Compute the proceeds from issuing the debentures.
2. Journal entries for the issuer concerning i) issuance, ii) first semiannual interest payment and iii) payment of maturity value
9-42 Q. No. 2 On December 31 2000, Ruzuinski Construction issued $ 20 million of 10-year, 10% debentures. The market interest rate at issuance was 14%
Required:
1. Compute the proceeds from issuing the debentures
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)
9-44 Q. No. 3 On January 1st 2001 Metro Bus issued $ million of 5-year 11% debentures. The market interest rate at issuance was 12%
Required:
1. Compute the proceeds from the issuance of debentures
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)
9-46 Q. No. 4 On December 2000 Sayers Toyota Issued $ 3 million of 10 year , 12 debentures. The market interest rate at issuance was 10%.
Required:
1. Compute the proceeds from issuing the debentures.
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)
9-47 Q. No. 5 On January 1st 2001, Melbourne Travel issued $ 4 million of 5-year 10% debentures. The market interest rate at issuance was 8%.
Required:
1. Compute the proceeds from issuing the debentures.
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)
9-49 Q. No. 6 On December 1, 2000 Caribbean Cruise issued $ 20 million of 10-year, 12% debentures. The market interest rate at issuance was 14%. On December 31, 2001 (after all interest payments and amortization had been recorded for 2001), the company purchased all the debentures for $ 19 million. Throughout their life, the debentures had been by a large insurance company.
Required:
1. Compute the gain or loss on early retirement.
2. Show the appropriate journal entry
3. At what price on December 31, 2001 could Caribbean Cruise redeem the bonds and realize a $ 500000 gain?
9-50 Q. No. 7 On December 31, 2005, real estate holding company issued $ 10 million of 10-year, 12% debentures. The market interest rate at issuance was 12%. Suppose that on December 31 2006 (after all interest payments and amortization had been recorded for 2006), the company purchased all the debentures for $ 9 million. The debentures had been held by a large insurance company throughout their life.
Show all amount in thousands of dollars.
Required:
1. Compute the gain or loss on early retirement (extinguishment).
2. By using the balance sheet equation, present an analysis of the transactions on the issuer's books.
3. Show the appropriate journal entry4.
9-57 Q. No. 8 The Chicago Packing Company acquired packaging equipment on a capital lease. There were annual lease payments of $ 40,000 at the end of each of 3 years. The implicit interest rate was 18% compounded annually.
Required:
1. Compute the present value of capital lease.
2. Prepare journal entries at the inception of the lease and for each of the 3 years. Distinguish between the short term and long term classifications of the lease.
ans
Q. No. 1
1. $16 million. Proceeds equal face amount when issued at par.
Interest expense equals interest payment.
Interest payment = 1/2 x 10% x $16,000,000 = $800,000
2. Sample Journal Entries
Bond Transactions
(In Thousands of Dollars)
Issuer's Records
a. Cash 16,000
Bonds payable 16,000
To record proceeds upon issuance
of 10% bonds maturing on
December 31, 2010.
b. Interest expense 800
Cash 800
To record payment of interest.
c. Bonds payable 16,000
Cash 16,000
To record payment of maturity
value of bonds and their retirement.
Q. No. 2
1. Proceeds equal the present values of interest and maturity payments at the market rate:
Interest payment = 1/2 x 10% x $20,000,000 =
$1,000,000
PV of interest payments, $1,000,000 x 10.5940* $10,594,000
PV of maturity payment, $20,000,000 x .2584** 5,168,000
Proceeds $15,762,000
* From Table 9-3, 7% column, 20-period row
** From Table 9-2, 7% column, 20-period row
First semi-annual interest expense,
7% x $15,762,000 $1,103,340
Semi-annual interest payment, 5% x $20,000,000 1,000,000
Amortization of bond discount $ 103,340
2. Journal Entries
(In Thousands of Dollars)
Issuer's Records
a. Cash 15,762
Discount on bonds payable 4,238
Bonds payable 20,000
To record proceeds upon issuance
of 10% bonds maturing on
December 31, 2010.
b. Interest expense 1,103
Discount on bonds payable 103
Cash 1,000
To record payment of interest and
amortization of discount.
c. Bonds payable 20,000
Cash 20,000
To record payment of maturity
value of bonds and their retirement.
Q. No. 3
1. Proceeds equal the present values of interest and maturity payments at the market rate:
Interest payment = 1/2 x 11% x $10,000,000 = $550,000
PV of interest payments, $550,000 x 7.3601* $4,048,055
PV of maturity payment, $10,000,000 x .5584** 5,584,000
Proceeds $9,632,055
* From Table 9-3, 6% column, 10-period row
** From Table 9-2, 6% column, 10-period row
2. First semi-annual interest expense,
6% x $9,632,055 $577,923
Semi-annual interest payment 550,000
Amortization of bond discount $ 27,923
2. a. Cash 9,632,055
Discount of bonds payable 367,945
Bonds payable 10,000,000
To record proceeds upon issuance
of 11% bonds maturing on
January 1, 2006.
b. Interest expense 577,923
Discount on bonds payable 27,923
Cash 550,000
To record amortization of discount
and payment of interest.
c. Bonds payable 10,000,000
Cash 10,000,000
To record payment of maturity
value of bonds and their retirement.
Q. No. 4
1. Proceeds equal the present values of interest and maturity payments at the market rate:
Interest payment = 1/2 x 12% x $3,000,000
= $180,000
PV of interest payments, $180,000 x 12.4622* $2,243,196
PV of maturity payment, $3,000,000 x .3769** 1,130,700
Proceeds $3,373,896
* From Table 9-3, 5% column, 20-period row
** From Table 9-2, 5% column, 20-period row
First semi-annual interest expense,
5% x $3,373,896 $168,695
Semi-annual interest payment,
6% x $3,000,000 180,000
Amortization of bond premium $ 11,305
2. Journal Entries
(In Thousands of Dollars)
Issuer's Records
a. Cash 3,374
Premium on bonds payable 374
Bonds payable 3,000
To record proceeds upon issuance
of 12%bonds maturing on
December 31, 2008.
b. Interest expense 169
Premium on bonds payable 11
Cash 180
To record payment of interest
and amortization of premium.
c. Bonds payable 3,000
Cash 3,000
To record payment of maturity
value of bonds and their retirement.
9-47 (25-40 min.)
1. Proceeds equal the present values of interest and maturity payments at the market interest rate.
Interest payment = 1/2 x 10% x $4,000,000 = $ 200,000
PV of interest payments, $200,000 x 8.1109* $1,622,180
PV of maturity payment, $4,000,000 x .6756** 2,702,400
Proceeds $4,324,580
* From Table 9-3, 4% column, 10-period row
** From Table 9-2, 4% column, 10-period row
First semi-annual interest expense, 4% x $4,324,580 $172,983
Semi-annual interest payment 200,000
Amortization of bond premium $ 27,017
2.
a. Cash 4,324,580
Bonds payable 4,000,000
Premium on bonds payable 324,580
To record proceeds upon issuance
of 10% bonds maturing on
January 1, 2006.
b. Interest expense 172,983
Premium on bonds payable 27,017
Cash 200,000
To record amortization of premium
and payment of interest.
c. Bonds payable 4,000,000
Cash 4,000,000
To record payment of maturity value
of bonds and their retirement.
Q. No. 6.
1. To compute the gain or loss, first calculate the net liability at December 31, 2001:
Face amount $20,000,000
Proceeds 17,880,800 *
Discount at issuance 2,119,200
6/30/01 discount amortization (51,656) **
12/31/01 discount amortization (55,272) †
Bond discount at 12/31/01 $ 2,012,272
* ($1,200,000 x 10.5940) + ($20,000,000 x .2584)
** (7% x $17,880,800) – (6% x $20,000,000)
† (7% x ($17,880,800 + $51,656)] - (6% x $20,000,000)
The net liability is the face amount less the discount:
Face amount $20,000,000
Bond discount at 12/31/01 2,012,272
Net liability at 12/31/01 $17,987,728
The amount by which the cash payment for the debentures exceeds the net liability is the loss on early extinguishment. Amounts are in thousands:
Cash payment $19,000
Net liability at 12/31/01 17,988
Loss on early extinguishment of debt $ 1,012
2. Journal Entry
(In Thousands)
Issuer's Records
December 31, 2001
Bonds payable 20,000
Loss on early extinguishment of debt 1,012
Discount on bonds payable 2,012
Cash 19,000
To record open-market acquisition of
entire issue of 12% bonds for $19 million.
3. A gain arises if the bond is extinguished for less than the carrying value, $17,987,728 – $500,000 gives a price of $17,487,728.
Q. No. 7. Amounts are in thousands of dollars.
1. Net liability equals face or par value $10,000
Cash received 9,000
Difference, gain on early extinguishment of debt $ 1,000
2.
Analysis of Early Extinguishment of Debt
(In Thousands of Dollars)
A = L + SE
Issuer's Records
Cash
= Bonds Payable
Retained Income
a. Redemption,
December 31, 2006 –9,000 = –10,000 +1,000
Journal Entry
Issuer's Records
December 31, 2006
Bonds payable 10,000
Gain on early extinguishment of debt 1,000
Cash 9,000
To record open-market acquisition of entire
issue of 12% bonds for $9.0 million.
Q. No. 8
1. PVA = $40,000 x Annuity Factor for 3 years at 18%
= $40,000 x 2.1743
= $86,972
2. Equipment leasehold 86,972
Lease liability, current* 24,345
Lease liability, long-term 62,627
To record capital lease.
Analysis of first installment:
Total amount $40,000
Interest, .18 x $86,972 15,655
Principal portion, current liability $24,345
Total liability $86,972
Current liability 24,345
Long-term liability $62,627
Entry for straight-line amortization of the asset for each of three years:
Amortization of equipment leasehold 28,991
Equipment leasehold 28,991
To record straight-line amortization:
$86,972 ÷ 3 = $28,991.
Lease Payments and Liability Reclassifications
Year One
Interest expense 15,655
Lease liability, current 24,345
Cash 40,000
To record interest expense and
reduction of liability.
Lease liability, long term 28,727
Lease liability, current 28,727
To reclassify next installment of
long-term debt as short-term debt.
Analysis of second installment:
Total $40,000
Interest portion:
.18 x ($86,972 – $24,345)
= .18 x $62,627 = 11,273
Principal portion, current liability $28,727
Total liability $62,627
Current liability 28,727
Long-term liability $33,900
Year Two
Interest expense 11,273
Lease liability, current 28,727
Cash 40,000
To record interest expense and
reduction of liability.
Lease liability, long-term 33,900
Lease liability, current 33,900
To reclassify next installment
of long-term debt as short-term debt.
Year Three
Interest expense 6,100
Lease liability, current 33,900
Cash 40,000
Analysis of third installment:
Total amount $40,000
Interest, .18 x $33,900 6,102
Principal $33,898*
* Rounding causes this amount to differ from the $33,900 liability. These rounding errors occur because the present value tables are carried to four places only rather than to five or more places. This rounding causes the present value of the lease to be rounded at its inception.
all the best
