BE14-8 Teton Corporation issued $600,000 of 7% bonds on November 1, 2014, for $644,636. The bonds were dated November 1, 2014, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2014, adjusting entry.
BE14-11 On January 1, 2014, Henderson Corporation issued $500,000 of bonds at 99. At the time of redemption, the unamortized premium was $15,000 and unamortized bonds issue cost were $5,250. Prepare the corporation’s journal entry to record the reacquisiton of the bonds.
BE14-5 Shlee Corporation issued a 4-year, $600,000, zero-interest-bearing note to Garcia Company on January 1, 2014, and received cash of $60,000, In addition, Shlee agreed to sell merchandise to Garcia at an amount of less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation’s January 1 entry.
EX14-2 (Classification) The following items are found in the financial statements.
(a) Discount on bonds payable.
(b) Interest expense (credit balance).
(c) Unamortized bonds issue costs.
(d) Gain on repurchase of debt.
(e) Mortgage payable (payable in equal amounts over next 3 years).
(f) Debenture bonds payable (maturing in 5 years).
(g) Notes payable (due in 4 years).
(h) Premium on bonds payable.
(i) Treasury bonds.
(j) Bonds payable (due in 3 years).
EX14-9 (Entries and Questions for Bond Transactions) On June 30, 2014, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay seminnual interest on June 30 and December 31.
(Round answers to the nearest cent.)
(a)Prepare the journal entries to record the following transactions.
(1)The issuance to the bonds on June 30, 2014.
(2)The payment of interest and the amortization of the premium on December 31, 2014.
(3)The payment of interest and the amortization of the premium on June 30, 2015.
(4)The payment of interest and the amortization on the premium on December 31, 2015.
(b)Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2015, balance sheet.
(c)Provide the answers to the following qustions.
(1)What amount of interest expense is reported for 2015?
(2)Will the bond interest expense reported in 2015 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(3)Determine the total cost of borrowing over the life of the bond.
(4)Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used/
EX14-19 (Fair Value Option) Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that is effective borrowing rate is quite low (less and 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes.
Carrying Value Fair Value
December 31, 2014 54,000 54,000
December 31, 2015 44,00 42,500
December 31, 2016 36,00 38,000
(a)Prepare the journal entry at December 31 (Fallen’s year-end) for 2014, 2015, and 2016, to record the fair value option for these notes.
(b)At the amount will the note be reported on Fallen’s 2015 balance sheet?
(c)What is the effect of recording the fair value option on these notes on Fallen’s income?
(d)Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2016? Explain.
P14-4 (Issuance and Redemption of Bonds; Income Statement Presentation) Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of $3,000,000 on January 2, 2,000 at a discount of $150,000, which is proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.
On December 18, 2014, the company issued it 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2015. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.
(a)Prepare journal entries to record the issuance of the 11% bonds and the redemption of the 9% bonds.
(b)Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.
BE15-4 Ravonette Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The common stock has a market price of $20 per share, and the preferred stock has a market price of $90 per share. Prepare the journal entry to record the issuance.
BE15-8 Arantxa Corporation has outstanding 20,000 shares of $5 par value common stock. On August 1, 2014, Arantxa reacquired 200 shares at $80 per share. On Novembe 1, Arantxa reissued the 200 shares at $70 per share. Arantxa had no previous treasury stock transactions. Prepare Arantxas journal entries to record these transactions using the cost method.
EX15-4 (Lump-Sum Sale of Stock with Bonds) Faith Evans Corporation is regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDQAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par common stock. The investment banker has retained 400 units as the underwriting fee. The other 9,600 units were sold to outside investors for cash at $880 per unit. Prior to this sale, the 2-week ask price of common stock was $40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.
(a)Prepare the journal entry to record Evans’ transaction, under the following condtitions.
(1)Employing the incremental method.
(2)Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
(b)Briefly explain which method is, in your opinion, the better method.
EX15-12 (Cash Dividend and Liquidating Dividend) Lotoya Davis Corporation has 10 million shares of common stock issued and outstanding. On June 1, the board of directors voted an 80 cents per share cash dividends to stockholders of record as of June 14, payable June 30.
(a)Prepare the journal entry for each of the dates above assuming the dividend a distribution earnings.
(b)How would the entry differ if the dividend were a liquidating dividend.
EX15-19 (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000.
Jana Kingston Co. Mary Ann Benson Co.
Current Liabilities 300,000 Current liabilities 600,000
Long-term debt, 10% 1,200,000 Common stock ($20 par) 2,900,000
Common stock ($20 par) 2,000,000 Retained earnings (Cash
Retained earnings (Cash dividends, 328,000) 700,000
dividends, $220,000) 700,000 4,200,000
For the year, each company has earned the same income before the interest and taxes.
Jana Kingston Co Mary Ann Benson Co
Income before interest and taxes 1,200,000 1,200,000
Interest expense 120,000 0
Income taxes (45%) 486,000 540,000
Net income 594,000 660,000
At year end, the market price of Kingston’s stock was $101 per share, and Benson’s was $63.50.
(a)Which company is more profitable in terms of return on total assets?
(b)Which company is more profitable in terms of return on common stock equity?
(c)Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
(d)From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
(e)What is the book value per share for each company?
P15-3 (Equity Transactions and Statement Preparation) Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity.
Preferred Stock, 150,000 shares 3,000,000
Common Stock, 2,000,000 shares 10,000,000
Paid-in Capital in Excess of Par—Preferred Stock 200,000
Paid-in Capital in Excess of Par–Common Stock 27,000,000
Retained Earnings 4,500,000
The following transactions affected stockholders’ equity during 2015.
Jan.1 30,000 shares of preferred stock issued at $22 per share.
Feb. 1 50,000 shares of common stock issued at $20 per share.
June 1 2-for-1 split (par value reduced to $2.50).
July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.
Sept. 15 10,000 shares of treasury stock reissued at $11 per share.
Dec. 31 The preferred dividend is declared, and a common dividend of .50 per share is declared.
Dec. 31 Net income is 2,100,000.
Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.