Nabilah Khansa Luthfiyah-1911000089 AKM-2

ASSIGNMENT 1

E14.11 (LO2) (Entries for Zero-Interest-Bearing Notes) On January 1, 2019, McLean AG

makes the two following acquisitions.
1. Purchases land having a fair value of €300,000 by issuing a 5-year, zero-interest-bearing
promissory note in the face amount of €505,518.
2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of
€400,000 (interest payable annually).
The company has to pay 11% interest for funds from its bank.
Instructions
a. Record the two journal entries that should be recorded by McLean AG for the two
purchases on January 1, 2019.
b. Record the interest at the end of the first year on both notes.
Jawaban
a. Journal entries that should be recorded by McLean AG for the two purchases on
January 1, 2019.

1. 01, Jan Land €300,000

2019 Notes payable €300,000
2. 01, Jan * Equipment €297,079
2019 Notes payable €297,079
*Face Value of the note $400,000
PV of Principal (table 6.2):
$400,000 (PVF8,11%) = $400,000 x 0.43393 $173,572

PV of Interest (table 6.4):

$400,000 (PVF-OA8,11%) = ($400,000 x 6%) x 5.14612 $123,000

24,000 $297,079
b. The interest at the end of the first year.

1. Dec 1, Interest Expense €33.000

2019 Notes payable (€300,000 x 11%) €33.000
2. Des 31, Interest Expense (€297,079 x 11%) €32,679
2019 Notes payable €8,679
Cash ($400,000 x 6%) €24,000

E14.14 (LO1,3) (Entry for Retirement of Bond; Bond Issue Costs) On January 2, 2016,
Prebish Corporation issued $1,500,000 of 10% bonds to yield 11% due December 31, 2025.
Interest on the bonds is payable annually each December 31. The bonds are callable at 101
(i.e., at 101% of face amount), and on January 2, 2019, Prebish called $1,000,000 face
amount of the bonds and retired them.
Nabilah Khansa Luthfiyah-1911000089 AKM-2
ASSIGNMENT 1

Instructions
a. Determine the price of the Prebish bonds when issued on January 2, 2016.
b. Prepare an amortization schedule for 2016–2020 for the bonds.
c. Ignoring income taxes, compute the amount of loss, if any, to be recognized by
Prebish as a result of retiring the $1,000,000 of bonds on January 2, 2019, and
prepare the journal entry to record the retirement.
Jawaban

a. Present value of the principal:

$1,500,000 x 0.35218 $528,270
Present value of the interest payments:
($1,500,000 X 10%) x 5.88923 $883,385
Present value (selling price) of the bonds $1,411,655

b. AMORTIZATION SCHEDULE
10-Year, 10% Bonds Sold to Yield 11%
Carrying
Date Cash Interest Discount Amount of
Paid Expense Amortized Bonds
Jan 1, 2016 $1,411,655
Dec 31, 2016 $150,000 $155,282 $5,282 $1,416,937
Dec 31, 2017 $150,000 $155,863 $5,863 $1,422,800
Dec 31, 2018 $150,000 $156,508 $6,508 $1,429,308
Dec 31, 2019 $150,000 $157,224 $7,224 $1,436,532
Dec 31, 2020 $150,000 $158,019 $8,019 $1,444,551

$1,411,655 x 11% = $155,282 Interest Expense

$155,282 - 150,000 = $5,282 Discount Amortized
$5,282 + $1,411,655 = $1,416,937 Carrying Amount of Bonds

c. Reacquisition price (1.000.000 x 1,01) $ 1.010.000

Carrying amount of bonds redeemed (1.429.308 x 1.000.000 / 1.500.000) $ 952.872
Loss on extinguishment $ 57.128

Bonds Payable
($1,429,308 X $1,000,000/$1,500,000) 952,872
Loss on Extinguishment of Bonds 57,128

Cash ($1,000,000 X 101%) 1,010,000

Nabilah Khansa Luthfiyah-1911000089 AKM-2
ASSIGNMENT 1

E14.19 (LO3) (Loan Modification) Use the same information as in E14.18 except that
Sterling Bank reduced the principal to £1,900,000 rather than £2,400,000. On January 1,
2023, Barkley pays £1,900,000 in cash to Sterling Bank for the principal.
Instructions
a. Prepare the journal entries to record the loan modification for Barkley.
b. Prepare the amortization schedule of the note for Barkley Company after the debt
modification.
c. Prepare the interest payment entries for Barkley on December 31 of 2020, 2021, and
2022.
d. What entry should Barkley make on January 1, 2023?
Jawaban
a
The note’s fair value can be calculated as follows:
.
Present value of restructured cash flows:
Present value of principal £1,900,000 table 6.2
£1,249,28
due in 3 years at 15% (£1,900,000 x 0.65752)
8
Present value of interest £190,000 table 6.4
paid annually for 3 years at 15%(£190,000 x
£433,814
2.28323)
£1,683,10
Fair value of note 2

Dec 31, 2019 Note Payable (Old) 1,900,000

Gain on Extinguishment of Debt 216,898
Nabilah Khansa Luthfiyah-1911000089 AKM-2
ASSIGNMENT 1

Note Payable (New) 1,683,102

b. BARKLEY COMPANY
Amortization Schedule After Debt Modification
Market-Interest Rate 15%
Carrying
Date Cash Interest Discount Amount of
Paid Expense Amortized Bonds
Dec 31, 2019 £1,683,102
Dec 31, 2020 £190,000 £252,465 £62,465 £1,745,567
Dec 31, 2021 £190,000 £ 261,835 £71,835 £1,817,402
Dec 31, 2022 £190,000 £272,598 £82,598 £1,900,000
TOTAL £570,000 £786,898 £216,898

c
. Interest payment entries for Barkley Company are:
252,46
Dec 31, 2020 Interest Expense 5
Note Payable 62,465
190,00
Cash 0
261,83
Dec 31, 2021 Interest Expense 5
Note Payable 71,835
190,00
Cash 0
272,59
Dec 31, 2022 Interest Expense 8
Note Payable 82,598
190,00
Cash 0

d. The payment entry at maturity is:

Jan 31, 2023 Note Payable 1,900,000
Cash 1,900,000
P14.2 (LO1, 3) (Issuance and Retirement of Bonds) Venzuela Co. is building a new hockey
arena at a cost of $2,500,000. It received a down payment 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 10.5%, 10-year bonds. These bonds were
issued on January 1, 2018, and pay interest annually on each January 1. The bonds yield
10%.
Instructions
a. Prepare the journal entry to record the issuance of the bonds on January 1, 2018.
Nabilah Khansa Luthfiyah-1911000089 AKM-2
ASSIGNMENT 1

b. Prepare a bond amortization schedule up to and including January 1, 2022.

c. Assume that on July 1, 2021, 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.
Jawaban
a. Present value of the principal
$2,000,000 x 0.38554 (PV10, 10%) $ 771,080
Present value of the interest payments
$210,000* x 6.14457 (PVOA10, 10%) $1,290,360
Present value (selling price of the bonds) $2,061,440

*$2,000,000 X 10.5% = $210,000

Cash 2,061,440
Bonds Payable. 2,061,440

b. SCHEDULE OF BOND PREMIUM AMORTIZATION

EFFECTIVE-INTEREST METHOD—ANNUAL INTEREST PAYMENTS

10-YEAR, 10,5% BONDS SOLD TO YIELD 10%

Carrying
Date Cash Interest Discount Amount of
Paid Expense Amortized Bonds
Jan 1, 2018 $ 2.061.440
Jan 1, 2019 $210,000 $ 206.144 $ 3.856 $ 2.057.584
Jan 1, 2020 $210,000 $ 205.758 $ 4.242 $ 2.053.342
Jan 1, 2021 $210,000 $ 205.334 $ 4.666 $ 2.048.676
Jan 1, 2022 $210,000 $ 204.868 $ 5.132 $ 2.043.544

c. Carrying amount as = Carrying amount as 01/01/2021 + Amortization of bond

07/01/2021 = 2.048.676+ (5.132/2)
= 2.044.610

Reacquisition price 1.065.000 $ 1.065.000

Carrying amount of bonds redeemed (2.046.110 /2) $ 1.023.055
Loss on extinguishment $ 41.945

July 1, 2021 Interest Payable (204.868 /2 x 6/12) $ 51,217

Bonds Payable $ 1.283
Cash (210.000/2 x 6/12) $ 52.500
July 1, 2021 Bond Payable $ 1.023.055
Loss on Extinguishment $ 41.945
Nabilah Khansa Luthfiyah-1911000089 AKM-2
ASSIGNMENT 1

Cash $ 1.065.000

P14.5 (LO2) (Entries for Zero-Interest-Bearing Note)

On December 31, 2019, Faital plc acquired a computer from Plato Group by issuing a £600,000
zerointerest-bearing note, payable in full on December 31, 2023. Faital Company's credit rating
permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a
5-year life and

a. £70,000 residual value. Instructions a. Prepare the journal entry for the purchase on December 31,
2019.

b. Prepare any necessary adjusting entries relative to depreciation (use straight-line) and
amortization on December 31, 2020.

c. Prepare any necessary adjusting entries relative to depreciation and amortization on December
31, 2021

Jawaban
a. 31/12/2019 Equipment € 409.806,00
Notes Payable € 409.806,00
PV of Principal - 600,000 x 0,68301 = € 409.806,00
b. 31/12/2020 Depreciation Expense € 67.961,20
Accumulated Depreciation - Equipment € 67.961,20
(409.806 - 70.000) / 5
31/12/2020 Interest Expense € 40.980,60
Notes Payable (409.806 x 10%) € 40.980,60

c. SCHEDULE OF NOTE DISCOUNT AMORTIZATION

EFFECTIVE-INTEREST METHOD
0% NOTE DICOUNT AT 10%
Carrying
Date Cash Interest Discount Amount of
Paid Expense Amortized Bonds
Dec 31, 2019 - - - € 409.806,00
Dec 31, 2020 - € 40.980,60 € 40.980,60 € 450.786,60
Dec 31, 2021 - € 45.078,66 € 45.078,66 € 495.865,26
Dec 31, 2022 - € 49.586,53 € 49.586,53 € 545.451,79
Dec 31, 2023 - € 54.545,18 € 54.545,18 € 599.996,96

31/12/2021 Depreciation Expense € 67.961,20

Accumulated Depreciation - Equipment € 67.961,20
31/12/2021 Interest Expense € 45.078,66
Notes Payable € 45.078,66