P14-1 Amortizing Bond Issue Costs and Bond Premiums

On January 1, 2009, the Baker Corporation issued $100,000 of five-year bonds due December 31,
2013, for $103,604.79 less bond issue costs of $3,000. The bonds carry a face rate of interest of
13% payable annually on December 31 and were issued to yield 12%. The company uses the
effective interest method of amortization.
Required
Prepare the journal entries to record the issuance of the bonds, all the interest payments, premium
amortizations, bond issue cost amortizations, and the repayment of the bonds.

P14-2 Computation of Effective Interest Rate

On June 30, 2010, the Watson Corporation sold $800,000 of 11% face value bonds for
$761,150.96. On December 31, 2010 the Watson Corporation sold $700,000 of this same bond
issue for $734,645.28. The bonds were dated January 1, 2010, pay interest semiannually on each
December 31 and June 30, and are due December 31, 2017.
Required
Compute the effective yield rate on each issuance of the Watson Corporation 11% bonds.

P14-3 Premium Amortization Schedule with Retirement Before Maturity

The Dorsett Corporation issued $600,000 of 13% bonds on January 1, 2009 for $614,752.24. The
bonds are due December 31, 2011, were issued to yield 12%, and pay interest semiannually on
June 30 and December 31. The company uses the effective interest method.
Required
1. Prepare a bond interest expense and premium amortization schedule.
2. Assume the company retired the bonds on September 30, 2011 for $630,000, which includes
accrued interest. Prepare the journal entry to record the bond retirement.

P14-4 Comprehensive

The Batson Corporation issued $800,000 of 12% face value bonds for $851,705.70. The bonds were
dated and issued on April 1, 2010, are due March 31, 2014, and pay interest semiannually on
September 30 and March 31. The company sold the bonds to yield 10%.
Required
1. Prepare a bond interest expense and premium amortization schedule using the straight-line
method.
2. Prepare a bond interest expense and premium amortization schedule using the effective interest
method.
3. Prepare any adjusting entries for the end of the fiscal year, December 31, 2010, using:
a. The straight-line method of amortization
b. The effective interest method of amortization
4. Assume the company retires the bonds on June 30, 2011, at 103 plus accrued interest. Prepare
the journal entries to record the bond retirement using:
a. The straight-line method of amortization
b. The effective interest method of amortization

P14-5 Discount Amortization Schedule and Retirement Before Maturity

Donaldson Incorporated sold $500,000 of 12% bonds on January 1, 2009, for $470,143.47, a price
that yields a 14% interest rate. The bonds pay interest semiannually on June 30 and December 31
and are due December 31, 2012. The company uses the effective interest method.
Required
1. Prepare an interest expense and discount amortization schedule.
2. Assume the company reacquired the bonds on July 1, 2011 at 104. Prepare journal entries to
record the bond retirement.

P14-6 Comprehensive

The Wilkerson Corporation issued $1 million of 13.5% bonds for $985,071.68. The bonds are dated
and issued October 1, 2010, are due September 30, 2014, and pay interest semiannually on March
31 and September 30. Assume an effective yield rate of 14%.
Required
1. Prepare a bond interest expense and discount amortization schedule using the straight-line
method.
2. Prepare a bond interest expense and discount amortization schedule using the effective interest
method.
3. Prepare adjusting entries for the end of the fiscal year December 31, 2010 using:
a. The straight-line method of amortization
b. The effective interest method of amortization

4. If income before interest and income taxes of 30% in 2011 is $500,000, compute net income
under each alternative.
5. Assume the company retired the bonds on June 30, 2011 at 98 plus accrued interest. Prepare the
journal entries to record the bond retirement using:
a. The straight-line method of amortization
b. The effective interest method of amortization
6. Compute the companys times interest earned (pretax operating income divided by interest
expense) under each alternative.

P14-7 Bond Refunding

The Baxter Corporation issued $400,000 of 11% bonds for $385,279.91 on January 1, 2009. The
bonds pay interest semiannually on June 30 and December 31, were issued to yield 12%, and are
due on December 31, 2013. Interest is amortized using the effective interest method, and the
bonds are callable at 105. In 2011 Baxter wishes to take advantage of more favorable market
interest rate conditions and issues $450,000 of 11%, 10-year bonds at 102 on June 1. Interest on
these bonds is payable each May 31 and November 30. Sufficient proceeds from this issue are used
to recall the
original issue on July 1, 2011.
Required
1. Prepare the journal entries to record (a) the original issue, (b) the new issue, and (c) the recall of
the old issue.
2. If the company were required to reflect the current yield each year, explain how it would account
for the bonds. For simplicity,
assume that the yield changes from 12% to 11% on January 1, 2011. No calculations are required.

P14-10 Notes Payable

The Houston Corporation acquires machinery from the South Company in exchange for a $20,000
non-interest-bearing, five-year note on June 30, 2009. The note is due on June 30, 2014. The
machinery has a fair value of $11,348.54, is subject to straight-line depreciation, and has an
estimated life of 10 years (no residual value). Houstons fiscal year ends June 30.
Required
Prepare the journal entries on each of the following dates to record the preceding information for
Houston Corporation:
1. June 30, 2009 4. June 30, 2012
2. June 30, 2010 5. June 30, 2013
3. June 30, 2011 6. June 30, 2014

P14-11 Notes Payable in Installments

Hamlet Corporation purchases computer equipment at a price of $100,000 on January 1, 2010,

paying $40,000 down and agreeing to pay the balance in three $20,000 annual installments
beginning December 31, 2010. It is not possible to value either the equipment or the $60,000 note
directly; however, Hamlets incremental borrowing rate is 12%.
Required
1. Prepare a schedule to compute the interest expense and discount amortization on the note.
2. Prepare all the journal entries for Hamlet to record the issuance of the note, each annual interest
expense, and the three annual installment payments.

P14-12 Notes Receivable

On January 1, 2010, the Somerville Corporation sold a used truck to the Cornelius Company and
accepted a $28,000 non-interest-bearing note due January 1, 2013. Somerville carried the truck on
its books at a cost of $30,000 and a current book value of $23,000. Neither the fair value of the
truck nor the note was available at the time of the sale; however, Corneliuss incremental
borrowing rate was 12%.
Required
1. Prepare the journal entries on Somervilles books to record:
a. The sale of the truck
b. The related adjusting entries on December 31, 2010, 2011, and 2012
c. The collection of the note on January 1, 2013
2. Prepare the notes receivable portion of Somervilles December 31, 2010, 2011, and 2012
balance sheets.

P14-19 ComprehensiveLoan Impairment and Troubled Debt Restructuring

The 10th National Bank has a $200,000, 12% note receivable from the Priday Company that is due
on December 31, 2013. On December 31, 2010, the company misses the interest payment due on
that date. The bank expects that the company will also miss the next payment, but will pay the
principal on the maturity date. On December 31, 2011 the company misses the interest payment
due on that date. On December 31, 2012, the company pays half the interest payment due on that
date and is not expected to pay the other half.
In early January 2013, the bank and the company agree to a loan restructuring because of the
financial condition of the company. The bank forgives the unpaid interest, extends the loan to
December 31, 2015, and reduces the interest rate to 6%. The market rate for the loan is estimated
to be 10% at this time.
Required
1. Compute the value of the impaired loan on December 31, 2010.
2. Prepare the journal entries from 2010 to 2015 for the bank to record the above events.

P16-1 Issuances of Stock

The Cada Corporation is authorized to issue 10,000 shares of $100 par, convertible, callable
preferred stock and 80,000 shares of no-par, no-stated-value common stock. There are currently
7,000 shares of preferred and 30,000 shares of common stock outstanding. The following are
several alternative transactions:
1. Purchased land by issuing 640 shares of preferred stock and 1,000 shares of common
stock. Preferred and common are currently selling at $113 and $36 per share, respectively.
No reliable appraisal of the land is available.
2. Same as transaction 1, except that land is appraised at $104,000 and the preferred stock
has no current market value.
3. Issued, for $99,000 cash, a combination of 400 shares of preferred stock and bonds
payable with a face value of $50,000. Currently, the preferred stock is selling for $120 per
share and the bonds at 104.
4. Same as transaction 3, except that the bonds do not have a current market value.
5. Same as transaction 3, except that the preferred stock does not have a current market
value.
6. Preferred stockholders (who had originally paid the corporation $110 per share for their
stock) convert 6,500 preferred shares into 19,500 shares of common stock. The current
market prices of the preferred stock and the common stock are $120 and $41 per share,
respectively.
7. The corporation calls the 7,000 shares of preferred stock (originally issued at $110 per
share) at $123 per share. Common stock is currently selling for $42 per share. Stockholders
elect not to convert into common stock.
8. Same as transaction 7, except that stockholders owning 2,000 shares of preferred stock
elect to convert each share into three shares of common stock. The remaining 5,000
preferred shares are retired.
Required
Prepare the journal entry necessary to record each transaction. Below each entry, explain your
reason for the values used.

P16-2 Issuances of Stock

The Epple Corporation is authorized to issue 20,000 shares of $100 par, convertible, callable
preferred stock and 100,000 shares of $10 stated value common stock. Currently, the company has

outstanding 6,000 shares of preferred stock and 40,000 shares of common stock. The following are
several alternative transactions:
1. Acquired a patent by issuing 2,500 shares of common stock and bonds with the face value
of $100,000. The stock is currently selling for $27 per share and the bonds are selling at
98.
2. Sold, for $96,000 cash, a package consisting of 500 shares of preferred stock and 2,000
shares of common stock. Currently, the preferred and common stock are independently
selling for $112 and $22 per share, respectively.
3. Purchased land by issuing 300 shares of preferred stock and 1,000 shares of common
stock. The common stock is selling for $25 per share, but the preferred stock is not being
actively traded. The value of the land is appraised at $57,000.
4. The corporation calls the 6,000 shares of preferred stock (originally issued at $108 per
share) at a call price of $112 per share. Common stock is currently selling for $23 per
share. The stockholders elect not to convert into common stock.
5. Same as transaction 4, except that stockholders owning 4,000 shares of preferred stock
elect to convert each share into five shares of common stock. The remaining 2,000 shares
of preferred stock are retired.
6. Upon approval by the state, the board of directors decides to split the common stock two
for one, reducing the stated value to $5 per share and increasing the authorization to
200,000 shares. (Remember, only 40,000 shares are issued and outstanding.)
7. Same as transaction 6, except that the stated value is reduced to $4 per share.
Required
Prepare the journal entry necessary to record each transaction. Below each entry, explain your
reason for the values used.

P16-3 Subscriptions

On August 3, 2010, the date of incorporation, the Quinn Company accepts separate subscriptions
for
1,000 shares of $100 par preferred stock at $104 per share and 9,000 shares of no-par, no-statedvalue common stock for $22 per share. The subscription contracts require a 10% down payment,
with the balance due by November 1, 2010. Shares are issued to each subscriber upon full
payment. Any defaulted shares will be sold on November 2, 2010, and the down payment returned
to the defaulting subscribers.
On November 1, the company received the remaining balances for 920 shares of preferred stock
and 8,900 shares of common stock. The defaulted preferred shares and common shares were sold
for $105 and $22.50 per share, respectively, on November 2, and the down payment was returned
to the defaulting subscribers.
Required
Prepare journal entries to record all the transactions related to
1. The preferred stock
2. The common stock

P16-4 Subscriptions

On July 3, the Wallace Company enters into a subscription contract with various investors. Terms of
the contract are as follows:
1. Number of shares: 10,000 shares of no-par, $6 stated-value common stock.
2. Price and payment schedule: Subscription price is $13 per share. A $3 per share down
payment is required, with a $5 per share payment due on both August 3 and October 3.
Shares are issued to each subscriber upon full payment.
3. Default provisions: Defaulted shares are to be sold on October 4 at the then-current market
price. If the proceeds from this sale are less than the total subscription price of the
defaulted shares, an amount necessary to bring the proceeds up to the total subscription
price is to be withheld from defaulted subscribers. Any remaining payments received from
defaulted subscribers are to be returned to them.
Required
Record the July 3, August 3, and the October 3 and 4 journal entries, assuming that a subscriber to
500 shares of stock
defaulted after making the down payment. The 500 shares were sold on October 4 for $11 per
share.