Reference no: EM131870249
Problem 1 - On January 1, 2013, Ouachita Airlines issued $400,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Ouachita Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $335,000 as determined by their fair value in the over-the-counter market.
Required:
1. Determine the price of the bonds at January 1, 2013, and prepare the journal entry to record their issuance. Show calculations.
2. Prepare the journal entry to record interest on June 30, 2013 (the first interest payment). Show calculations.
3. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). Show calculations.
4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. Show calculations.
Problem 2 - On January 1, 2013, Holbrook Company leased a building under a three-year operating lease. The annual rental payments are $68,000 on January 1, 2013, the inception of the lease, and $50,000 January 1 of 2014 and 2015. Holbrook made structural modifications to the building costing $90,000 before occupying the building. The useful life of the building and the modifications is 30 years with no expected residual value.
Required: Prepare the appropriate journal entries for Holbrook Company for 2013. Holbrook's fiscal year is the calendar year, and the company uses straight-line depreciation.
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