2010-03-17_135516_diane_2

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P15-2A Kusmaul Electric sold $500,000, 10%, 10-year bonds on January 1, 2010. The bonds were dated January 1 and paid interest on January 1 and July 1. The bonds were sold at 104. Hint: Prepare entries to record issuance of bonds, interest accrual, and bond redemption. (SO 2, 3, 6) Instructions (a) Prepare the journal entry to record the issuance of the bonds on January 1, 2010. (b) At December 31, 2010, the balance in the Premium on Bonds Payable account is $18,000. Show the balance sheet presentation of accrued interest and the bond liability at December 31, 2010. (c) On January 1, 2012, when the carrying value of the bonds was $516,000, the company redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the period has already been paid. Loss $9,000 (a) 2010 Jan. 1 Cash ($500,000 X 1.04)................................... 520,000 Bonds Payable....................................... 500,000 Premium on Bonds Payable.................. 20,000 (b) Current Liabilities Bond interest payable ($500,000 X 10% X 1/2)............................................ $ 25,000 Long-term Liabilities Bonds payable, due 2020............................................ $500,000 Add: Premium on bonds payable........................... 18,000 $518,000 (c) 2012 Jan. 1 Bonds Payable................................................. 500,000** Premium on Bonds Payable......................... 16,000** Loss on Bond Redemption............................... 9,000* Cash ($500,000 X 1.05)................................... 525,000 *($525,000 – $516,000) P15-3A Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31, 2009. The proceeds from the note are to be used in financing a new research laboratory. The terms of the note provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $29,433. Payments are due June 30 and December 31.

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2010-03-17

Transcript of 2010-03-17_135516_diane_2

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P15-2A Kusmaul Electric sold $500,000, 10%, 10-year bonds on January 1, 2010. The bonds were dated January 1 and paid interest on January 1 and July 1. The bonds were sold at 104. Hint: Prepare entries to record issuance of bonds, interest accrual, and bond redemption. (SO 2, 3, 6) Instructions (a) Prepare the journal entry to record the issuance of the bonds on January 1, 2010. (b) At December 31, 2010, the balance in the Premium on Bonds Payable account is $18,000. Show the balance sheet presentation of accrued interest and the bond liability at December 31, 2010. (c) On January 1, 2012, when the carrying value of the bonds was $516,000, the company redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the period has already been paid. Loss $9,000

(a) 2010Jan.  1 Cash ($500,000 X 1.04)........................................   520,000

Bonds Payable............................................   500,000

Premium on Bonds Payable........................20,000

(b) Current LiabilitiesBond interest payable  ($500,000 X 10% X 1/2)............................................... $

25,000

Long-term LiabilitiesBonds payable, due 2020.................................................. $500,000Add: Premium on bonds payable................................... 18,000

$518,000

(c) 2012Jan.  1 Bonds Payable...................................................... 500,000**

Premium on Bonds Payable................................ 16,000**Loss on Bond Redemption.................................. 9,000*Cash ($500,000 X 1.05)........................................

525,000

*($525,000 – $516,000)

P15-3A Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31, 2009. The proceeds from the note are to be used in financing a new research

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laboratory. The terms of the note provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $29,433. Payments are due June 30 and December 31. Hint: Prepare installment payments schedule and journal entries for a mortgage note payable. (SO 4) Instructions (a) Prepare an installment payments schedule for the first 2 years. (b) Prepare the entries for (1) the loan and (2) the first two installment payments. June 30 Mortgage Notes Payable $13,433 (c) Show how the total mortgage liability should be reported on the balance sheet at December 31, 2010. Current liability—2010: $29,639

(a) SemiannualInterest Period

CashPayment

InterestExpense

Reduction ofPrincipal

PrincipalBalance

Issue Date1234

$29,433 29,433 29,433 29,433

$16,000 15,463 14,904 14,323

$13,433 13,970 14,529 15,110

$400,000 386,567 372,597 358,068 342,958

(b) 2009Dec. 31 Cash .............................................................400,000

Mortgage Notes Payable................................400,000

2010June 30 Interest Expense.......................................................  16,000

Mortgage Notes Payable..........................................  13,433Cash.................................................................

 29,433

Dec. 31 Interest Expense.......................................................  15,463Mortgage Notes Payable..........................................  13,970

Cash................................................................. 29,433

(c) 12/31/10Current Liabilities

Current portion of mortgage notes payable  $ 29,639**

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Long-term LiabilitiesMortgage notes payable, due 2019 $342,958

**

**($14,529 + $15,110)**($372,597 – $14,529 – $15,110)

P15-4A Presented below are three different lease transactions that occurred for Kear Inc. in 2010. Assume that all lease contracts start on January 1, 2010. In no case does Kear receive title to the properties leased during or at the end of the lease term. Lessor Jansen Delivery Flood Co. Louis Auto Type of property Computer Delivery equipment Automobile Yearly rental $ 6,000 $ 4,200 $ 3,700 Lease term 6 years 4 years 2 years Estimated economic life 7 years 7 years 5 years Fair market value of lease asset $33,000 $19,000 $11,000 Present value of the lease rental payments $31,000 $13,000 $ 6,400 Bargain purchase option None None None Hint: Analyze three different lease situations and prepare journal entries. (SO 2) Instructions (a) Which of the leases above are operating leases and which are capital leases? Explain. (b) How should the lease transaction for Flood Co. be recorded in 2010? (c) How should the lease transaction for Jansen Delivery be recorded on January 1, 2010?

(a) Kear Inc. should record the Jansen Delivery lease as a capital lease because: (1) the lease term is greater than 75% of the estimated economic life of the leased property and (2) the present value of the lease payments is 90% or more of the fair market value of the computer. It should be noted that only one condition needs to be met to require capitalization.

Both the Flood Co. and Louis Auto leases should be reported as operating leases because none of the four conditions is met to require treatment as a capital lease.

(b) The Flood Co. lease is an operating lease. The entry to record the lease payment in 2010 therefore is as follows:

Rent Expense........................................................................................  4,200Cash............................................................................................

 4,200

(c) The Jansen Delivery lease is a capital lease. The entry to record the capital lease on January 1, 2010 therefore is as follows:

Leased Asset—Computer................................................................... 31,000

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Lease Liability............................................................................31,000

*P15-5A On July 1, 2010, Atwater Corporation issued $2,000,000 face value, 10%, 10-year bonds at $2,271,813. This price resulted in an effective-interest rate of 8% on the bonds. Atwater uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1. Hint: Prepare entries to record issuance of bonds, payment of interest, and amortization of bond premium using effective-interest method. (SO 2, 8) Instructions (Round all computations to the nearest dollar.) (a) Prepare the journal entry to record the issuance of the bonds on July 1, 2010. (b) Prepare an amortization table through December 31, 2011 (3 interest periods) for this bond issue. (c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2010. Amortization $9,127 (d) Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2011, assuming no accrual of interest on June 30. Amortization $9,493 (e) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2011. Amortization $9,872

(a) 2010July  1 Cash ....................................................2,271,813

Bonds Payable..........................................2,000,000

Premium on Bonds  Payable..................................................  

271,813

(b) ATWATER CORPORATIONBond Premium Amortization

Effective-Interest Method—Semiannual Interest Payments10% Bonds Issued at 8%

Semi-annualInterestPeriods

(A)

Interestto BePaid

(B)

InterestExpense

(C)Premium

Amor-tization(A) – (B)

(D)Unamor-

tizedPremium(D) – (C)

(E)Bond

CarryingValue

($2,000,000 + D)

Issue date123

$100,000 100,000 100,000

$90,873 90,507 90,128

$9,127 9,493 9,872

$271,813 262,686 253,193 243,321

$2,271,813 2,262,686 2,253,193 2,243,321

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(c) Dec. 31 Bond Interest Expense  ($2,271,813 X 4%).......................................... 90,873Premium on Bonds Payable..............................    9,127

Bond Interest Payable  ($2,000,000 X 5%)................................

100,000

(d) 2011July  1 Bond Interest Expense

  [($2,271,813 – $9,127) X 4%]........................ 90,507Premium on Bonds Payable..............................    9,493

Cash...........................................................   100,000

(e) Dec. 31 Bond Interest Expense  [($2,262,686 – $9,493) X 4%]........................ 90,128Premium on Bonds Payable..............................    9,872

Bond Interest Payable..............................   100,000