Determine the effective-interest rate

Reference no: EM132358958

Accounting Basics Questions -

Q1. Larkspur Company sells 10% bonds having a maturity value of $2,150,000 for $1,995,003. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Set up a schedule of interest expense and discount amortization under the straight-line method.

Q2. Wildhorse Company sells 10% bonds having a maturity value of $1,950,000 for $1,877,929. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Determine the effective-interest rate.

Set up a schedule of interest expense and discount amortization under the effective-interest method.

Q3. Marigold Company had bonds outstanding with a maturity value of $312,000. On April 30, 2017, when these bonds had an unamortized discount of $11,000, they were called in at 105. To pay for these bonds, Marigold had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 101 (face value $312,000).

Ignoring interest, compute the gain or loss.

Ignoring interest, record this refunding transaction.

Q4. On January 1, 2017, Larkspur Company makes the two following acquisitions.

1. Purchases land having a fair value of $220,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $333,975.

2. Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $340,000 (interest payable annually on January 1).

The company has to pay 11% interest for funds from its bank.

(a) Record the two journal entries that should be recorded by Larkspur Company for the two purchases on January 1, 2017.

(b) Record the interest at the end of the first year on both notes using the effective-interest method.

Q5. Flint Company commonly issues long-term notes payable to its various lenders. Flint has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Flint has elected to use the fair value option for the long-term notes issued to Barclay's Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk.

	Carrying Value	Fair Value
December 31, 2017	$50,700	$50,700
December 31, 2018	47,600	46,000
December 31, 2019	38,500	40,400

(a) Prepare the journal entry at December 31 (Flint's year-end) for 2017, 2018, and 2019, to record the fair value option for these notes.

(b) At what amount will the note be reported on Flint's 2018 balance sheet?

(c) What is the effect of recording the fair value option on these notes on Flint's 2019 income? The effect of recording the fair value option would result in unrealized holding?

Q6. At December 31, 2017, Kingbird Company has outstanding three long-term debt issues. The first is a $2,360,000 note payable which matures June 30, 2020. The second is a $5,620,000 bond issue which matures September 30, 2021. The third is a $14,460,000 sinking fund debenture with annual sinking fund payments of $2,892,000 in each of the years 2019 through 2023.

Prepare the required note disclosure for the long-term debt at December 31, 2017.

Q7. On April 1, 2017, Pearl Company sold 18,000 of its 12%, 15-year, $1,000 face value bonds at 96. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Pearl took advantage of favorable prices of its stock to extinguish 6,600 of the bonds by issuing 217,800 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company's stock was selling for $32 per share on March 1, 2018.

Prepare the journal entries needed on the books of Pearl Company to record the following.

(a) April 1, 2017: issuance of the bonds.

(b) October 1, 2017: payment of semiannual interest.

(d) March 1, 2018: extinguishment of 6,600 bonds. (No reversing entries made.)

Q8. Pina Company issued $696,000 of 10%, 20-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Pina Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.

Prepare the journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2017.

Q9. Bonita Company issued $552,000 of 10%, 20-year bonds on January 1, 2017, at 101. Interest is payable semiannually on July 1 and January 1. Bonita Company uses the straight-line method of amortization for bond premium or discount.

Prepare the journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest and the related amortization on July 1, 2017.

Attachment:- Accounting Basics Questions.rar

Reference no: EM132358958

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8/20/2019 9:39:50 PM

Note - Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.

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