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# Compute bond prices; prepare journal entries for stock and bond transactions

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On January 1, a company issues bonds with a par value of \$300,000. The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Present value of annuity for 10 periods at 3% 8.5302
Present value of annuity for 10 periods at 4% 8.1109
Present value of 1 due in 10 periods at 3% 0.7441
Present value of 1 due in 10 periods at 4% 0.6756
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A corporation had stockholders' equity on January 1 as follows: Common Stock, \$5 par value, 1,000,000 shares authorized, 500,000 shares issued; Contributed Capital in Excess of Par Value, Common Stock, \$1,000,000; Retained Earnings, \$3,000,000. Prepare journal entries to record the following transactions:

Feb 15 The board of directors declared a 5% stock dividend to stockholders of record on March 1, to be issued on March 20. The stock was trading at \$6 per share prior to the dividend.

MAR 1 The date of record

MAR 20 Issued the stock dividend
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On January 1, 2007, a company issued 10-year, 10% bonds payable with a par value of \$500,000, and received \$442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1, 2007.
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Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to record the following transactions. Include any year-end adjustments.

DEC 21 Purchased inventory for Acquilla Co. for 500,000 Mexican pesos. The exchange rate was \$0.0914 per peso. The credit terms were n/30.

DEC 31 The exchange rate was \$0.0917 per peso.

JAN 20 Paid Acquilla Co. for the Dec 32 purchase. The exchange rate was \$0.0920 per peso.

#### Solution Preview

On January 1, a company issues bonds with a par value of \$300,000. The bonds mature in 5 years and pay 8% annual (this should be semi annual) interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:
Present value of annuity for 10 periods at 3% 8.5302
Present value of annuity for 10 periods at 4% 8.1109
Present value of 1 due in 10 periods at 3% 0.7441
Present value of 1 due in 10 periods at 4% 0.6756

The price of the bonds is the present value of interest and principal. The annual interest is 300,000X8% = 24,000 and the principal amount is \$300,000. Interest is an annuity and so we use the PV of annuity. Principal is a lump sum and so we use PV of \$1. The discounting rate is the market rate of interest which is 6%. The tables above imply semi annual interest payment as we are given for 10 periods and 3% and 4% rate. Doing on semi annual basis, semi annual interest would be 12,000, periods would be 10 and rate would be 6%/2 = 3%
Price of bonds = 12,000 X 8.5302 + ...

#### Solution Summary

The solution explains how to compute bond prices and journal entries relating to stock and bond transactions

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## Long Term Liabilities- Entries for Bond Transactions

E14-3 (Entries for Bond Transactions) Presented below are two independent situations.
1. On January 1, 2012, Divac Company issued \$300,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1.
2. On June 1, 2012, Verbitsky Company issued \$200,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.
Instructions
For each of these two independent situations, prepare journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest on July 1.
(c) The accrual of interest on December 31.

E14-7 (Amortization Schedules?Straight-Line) Spencer Company sells 10% bonds having a maturity value of \$3,000,000 for \$2,783,724. The bonds are dated January 1, 2012, and mature January 1, 2017. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the effective-interest method.

E14-10 (Entries for Bond Transactions) On January 1, 2012, Osborn Company sold 12% bonds having a maturity value of \$800,000 for \$860,651.79, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2012, and mature January 1, 2017, with interest payable December 31 of each year. Osborn Company allocates interest and unamortized discount or premium on the effective-interest basis.
Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for 2012-2014.
(c) Prepare the journal entry to record the interest payment and the amortization for 2012.
(d) Prepare the journal entry to record the interest payment and the amortization for 2014.

E14-17 (Imputation of Interest) Presented below are two independent situations:
(a) On January 1, 2013, Spartan Inc. purchased land that had an assessed value of \$390,000 at the time of purchase. A \$600,000, zero-interest-bearing note due January 1, 2016, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2013, and the interest expense to be reported in 2013 related to this transaction.
(b) On January 1, 2013, Geimer Furniture Co. borrowed \$4,000,000 (face value) from Aurora Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Geimer Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2013.

E14-21 (Settlement of Debt) Strickland Company owes \$200,000 plus \$18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2012, Strickland's business deteriorated due to a faltering regional economy. On December 31, 2012, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of \$390,000, accumulated depreciation of \$221,000, and a fair value of \$180,000.
Instructions
(a) Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
(b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2012 income statement?
(c) Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock (\$10 par) which has a fair value of \$180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland's stock as a trading investment, prepare the entries to record the transaction for both parties.

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