Reference no: EM132064604

Bonds & Long-term Liabilities Problems -

Problem 1 - On January 1, 2015, Krishna Company issued $100,000 of five-year, 10% face value bonds that pay interest semi-annually each June 30 and December 31. The bonds were issued to yield a 12% return.

Required:

a. Prepare the journal entry to record the issuance of the bond.

b. Prepare an amortization to record the amortization of the premium or discount, using the effective interest method.

c. Prepare the journal entry for the first interest payment, assuming that Krishna uses the effective-interest method to amortize the premium or discount. (Your figures will come from the amortization table).

d. Prepare the journal entry for the first interest payment, assuming that Krishna uses the straight-line method to amortize the premium or discount.

Problem 2 - How does a company initially account for bond issue costs? In what type of account do they record these costs (asset, expense, liability, equity or revenue?) Are these costs added to/deducted from the cash proceeds from a bond issuance? What method do they use to amortize these costs?

Problem 3 - On March 1, 2015, Costner Company issued five-year, 8%, $1,000,000 face value bonds at par plus accrued interest. The bonds were dated January 1, 2015, and pay interest semiannually each June 30 and December 31.

Required:

1. Prepare the journal entry for the bond issuance on March 1, 2015.

2. Prepare the journal entries for the interest payments on June 30, 2015 and December 31, 2015.

3. How much interest expense, in total, will Costner Company recognize in the year 2015?

4. Ignoring the answers above, assume that, on April 1, 2015, Costner issued the $1,000,000 face value bonds at 103 plus accrued interest. Prepare the journal entry for the issuance of the bonds on April 1. (You do not need to prepare entries for the interest payments under this scenario, only the issuance of the bond).

Note: You can use either the method outlined in the textbook or the one outlined in the additional problems to solve this problem.

Problem 4 - On January 1, 2015, Xing Company issued five-year, 8%, $1,000,000 face value bonds that pay interest semiannually each June 30 and December 31. The market rate of other, similar bonds was 7%. (Hint: You need to use this information to determine the issue price of the bond). On December 31, 2015, Xing redeemed all of the outstanding bonds at 103.

Required:

1. Prepare the journal entry to record the redemption of the bonds on December 31, 2015, assuming that Xing used the effective interest method to amortize any bond premium or discount. (Be sure to include calculations for any gain or loss on redemption).

2. Assume that, instead of redeeming all of the bonds, Xing only redeemed 30% of the outstanding bonds at 105. Prepare the journal entry to record the redemption, assuming that Xing uses the effective interest method to amortization and bond premium or discount.