ACC5326 Financial Intermediate Accounting II

Week 2 Assignment 2

E-1 (Entries for Bond Transactions—Straight-Line) Celine Dion Company issued $600,000 of 10% 20-year bonds on January 1, 2014, at 102 Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line method of amortization for bond premium or discount.

Instructions:

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, 2014.

(c) The accrual of interest and the related amortization on December 31, 2014.

E-2

Assume the same information as in E-1, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount.  Assume an effective yield of 9.7705%

Instructions:

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2014.

(c) The accrual of interest and the related amortization on December 31, 2014.

P-1 (Issuance and Retirement of Bonds)

Venezuela Co. is building a new hockey arena at a cost of $2,500,000. It received a downpayment of $500,000 from local businesses to support the project, and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of 10.50% 10-year bonds. These bonds were issued on January 1, 2013, and pay interest annually on each January 1. The bonds yield 10.00%. Venezuela paid $50,000 in bond issue costs related to the bond sale.

Note: Use of tables or financial calculators may result is slightly different values due to rounding and significant digits.

Instructions:

(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2013.

(b) Prepare a bond amortization schedule up to and including January 1, 2017, using the effective interest method.

(c) Assume that on July 1, 2016, Venzuela Co. retires half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this retirement.

Hint: Resolve value of unamortized bond issue costs for the bonds being retired.

Hint: Resolve carrying value of the bonds being retired.

P-2 (Comprehensive Bond Problem)

(Note: Calculations with financial calculators or tables might result in slightly different values due to rounding.)

In each of the following independent cases the company closes its books on December 31.
For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Instructions: (Round to the nearest dollar.)

1. Sanford Co. Sells $500,000 of 10% bonds on March 1, 2014. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2017.

The bonds yield 12% Give the entries through December 31, 2015.

2. Titania Co. Sells $400,000  of 12% bonds on June 1, 2014. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2018. The bonds yield 10% On October 1, 2015, Titania buys back $120,000 worth of the bonds for $126,000 (includes accrued interest). Give the entries through December 31, 2016.

Week 2 Assignment 2

Case 1

On March 1, 2011, Silicon Company sold  its 5-year, $1,000 face value, 9% bonds dated March 1, 2011 at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2011. Silicon  uses the effective-interest method of amortization. Bond issue costs were incurred in preparing and selling the bond issue. The bonds can be called by Silicon  at 101 at any time on or after March 1, 2012

Answer the following questions:

(a) (1) How would the selling price of the bond be determined?

(2) Specify how all items related to the bonds would be presented in a balance sheet prepared Immediately after the bond issue was sold.

(b) What items related to the bond issue would be included in Silicon ’s 2011 income statement, and
how would each be determined?

(c) Would the amount of bond discount amortization using the effective-interest method of amortization be lower in the second or third year of the life of the bond issue? Why?

(d) Assuming that the bonds were called in and retired on March 1, 2012, how should Silicon report
the retirement of the bonds on the 2012 income statement?