14-9 (Entries for Bond Transactions)

On January 1, 2015, 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, 2015, and mature January 1, 2020, with
interest payable December 31 of each year.
Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for 2015–
2017.
(c) Prepare the journal entry to record the interest payment and the
amortization for 2015.
(d) Prepare the journal entry to record the interest payment and the
amortization for 2017.
 
EXERCISE 14-9

(a) January 1, 2015

Cash 860,651.79
Bonds Payable 860,651.79

(b) Schedule of Interest Expense and Bond Premium Amortization

Effective-Interest Method (12% Bonds Sold to Yield 10%)

Year Cash Interest Premium Carrying

Paid Expense Amortized Amount
of Bonds
1/1/15 — — — £860,651.79
12/31/15 £96,000.00 £86,065.18 £ 9,934.82 850,716.97
12/31/16 96,000.00 85,071.70 10,928.30 839,788.67
12/31/17 96,000.00 83,978.87 12,021.13 827,767.54
(c) December 31, 2015

Interest Expense 86,065.18

Bonds Payable 9,934.82
Cash 96,000.00

(d) December 31, 2017

Interest Expense 83,978.87

Bonds Payable 12,021.13
Cash 96,000.00
P14-1 (Analysis of Amortization Schedule and Interest Entries)

The amortization and interest schedule on page 692 reflects the issuance of 10-year
bonds by Capulet Corporation on January 1, 2009, and the subsequent interest payments
and charges. The company’s year-end is December 31, and financial statements are
prepared once yearly.

Amortization Schedule

Amount
Year Cash Interest Unamortized Book Value
1/1/2009 €5,651 € 94,349
2009 €11,000 €11,322 5,329 94,671
2010 11,000 11,361 4,968 95,032
2011 11,000 11,404 4,564 95,436
2012 11,000 11,452 4,112 95,888
2013 11,000 11,507 3,605 96,395
2014 11,000 11,567 3,038 96,962
2015 11,000 11,635 2,403 97,597
2016 11,000 11,712 1,691 98,309
2017 11,000 11,797 894 99,106
2018 11,000 11,894 - 100,000
Instructions
(a) Indicate whether the bonds were issued at a premium or a discount
and how you can determine this fact from the schedule.
(b) Determine the stated interest rate and the effective-interest rate.
(c) On the basis of the schedule, prepare the journal entry to record the
issuance of the bonds on January 1, 2009.
(d) On the basis of the schedule, prepare the journal entry or entries to
reflect the bond transactions and accruals for 2009. (Interest is paid
January 1.)
(e) On the basis of the schedule, prepare the journal entry or entries to
reflect the bond transactions and accruals for 2016.
The bonds were sold at a discount of €5,651. Evidence of the discount is the January1,
2009 book value of €94,349, which is less than the maturity value of €100,000 in 2018.

(b) The stated rate is 11% (€11,000 ÷ €100,000).

The effective rate is 12% (€11,322 ÷ €94,349).

(c) January 1, 2009

Cash 94,349
Bonds Payable 94,349

(d) December 31, 2009

Interest Expense 11,322
Bonds Payable 322
Interest Payable 11,000

(e) January 1, 2016 (Interest Payment)

Interest Payable 11,000
Cash 11,000

December 31, 2016

Interest Expense 11,712
Bonds Payable 712
Interest Payable 11,000
E14-17 (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 2015, Strickland’s business
deteriorated due to a faltering regional economy. On December 31, 2015, 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 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 2015 income statement?
(c) Assume that, instead of transferring the machine, Strickland decides to
grant 15,000 of its ordinary shares ($10 par), which have a fair value of $180,000 in
full settlement of the loan obligation. Prepare the entries to record the transaction.
(a) Transfer of property on December 31, 2015:
Strickland Company (Debtor):
Notes Payable 200,000
Interest Payable 18,000
Accumulated Depreciation—Equipment 221,000
Machine 390,000
Gain on Disposition of Equipment 11,000a
Gain on Extinguishment of Debt 38,000b

a
$180,000 – ($390,000 – $221,000) = $11,000.
b
($200,000 + $18,000) – $180,000 = $38,000.
(b) “Gain on Disposition of Equipment” and the “Gain on Extinguishment of Debt”
should be reported under Other income and expense in the income statement.

(c) Granting of equity interest on December 31, 2015:

Strickland Company (Debtor):

Notes Payable 200,000
Interest Payable 18,000
Share Capital—Ordinary
($15,000 X $10)
150,000
Share Premium—Ordinary
($180,000 – $150,000)
30,000
Gain on Extinguishment of Debt 38,000