Accounting Cengage Chapter 14 15 Exercises and problems (WILL TIP WELL)

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1. Activation Exercise 14-1: Bonds Issued at a Discount Terms and Definitions The interest rate paid on the face amount of a bond is called the contract rate of interest is less than the market rate of interest, the bonds will sell for this case is called a of interest. The interest rate paid on similar risk bonds is called the of interest. When the their face value. The difference between the selling price and the face amount of the bonds in Understanding the Business Transaction On January 1, 2014 Jack Company issued the following bonds that have a ten-year maturity and pay interest semi-annually. Face Value Contract Rate Market rate The bonds will sell at: $4,460,000 6% 10% than their face value because the bond will pay interest If the market rate of interest is greater than the contract rate of interest, the bonds will sell for than a buyer could earn on similar risk bonds issued by another company. Recording in the Accounting System On January 1, 2014, Jack Company issues the $4,460,000, 6%, 10-year bonds described above for cash of $3,348,373. Journalize the issuance of the Jack Company bonds. If an amount box does not require an entry, leave it blank. When bonds sell at a discount, their carrying value will be their face value. Recording in the Accounting System On January 1, 2014, Jack Company issues the $4,460,000, 6%, 10-year bonds described above for cash of $3,348,373. Journalize the issuance of the Jack Company bonds. If an amount box does not require an entry, leave it blank. When bonds sell at a discount, their carrying value will be their face value. 1. Activation Exercise 14-1: Bonds Issued at a Discount Terms and Definitions The interest rate paid on the face amount of a bond is called the contract rate of interest is less than the market rate of interest, the bonds will sell for this case is called a of interest. The interest rate paid on similar risk bonds is called the of interest. When the their face value. The difference between the selling price and the face amount of the bonds in Understanding the Business Transaction On January 1, 2014 Jack Company issued the following bonds that have a ten-year maturity and pay interest semi-annually. Face Value Contract Rate Market rate The bonds will sell at: $4,460,000 6% 10% than their face value because the bond will pay interest If the market rate of interest is greater than the contract rate of interest, the bonds will sell for than a buyer could earn on similar risk bonds issued by another company. Recording in the Accounting System On January 1, 2014, Jack Company issues the $4,460,000, 6%, 10-year bonds described above for cash of $3,348,373. Journalize the issuance of the Jack Company bonds. If an amount box does not require an entry, leave it blank. When bonds sell at a discount, their carrying value will be their face value. Activation Exercise 14-2: Straight Line Bond Discount Amortization Terms and Definitions When a bond sells for less than its face amount, the difference between the selling price and the face amount is called a . A bond discount or premium must be amortized to interest expense The straight line method amortizes equal amounts of bond discount or premium to interest expense each period. Amortization of a bond discount the contract rate of interest to a rate of interest that approximates the market rate of interest. Understanding the Business Transaction the contract rate of interest. Discount amortization is the amount of cash interest paid, causing Bonds sell at a discount when the market rate of interest is the amount of interest expense reported on the income statement to be the amount of semi-annual cash interest paid on a bond. On January 1, 2014, Jack Company issues $3,737,000, 9%, 10-year bonds for cash of $2,913,488 when the market rate of interest is 13%. The bonds pay interest semi-annually on June 30 and December 31. Determine (1) the discount on bonds payable at the date of issuance, (2) the semi-annual cash interest payment, (3) the semi-annual discount amortization using the straight line method, and (4) the semi-annual interest expense. Round your answers to the nearest whole dollar amount. Selling Price of Bonds Face Value of Bonds Discount on Bonds Payable Cash interest payment Discount amortization Interest expense Recording in the Accounting System Journalize the first interest payment and the amortization of the bond discount on June 30, 2014. Round your answers to the nearest whole dollar amount. If an amount box does not require an entry, leave it blank. When bonds sell at a discount, the semi-annual interest expense reported in the income statement will be the semi-annual cash interest paid to bondholders. 3. Activation Exercise 14-3: Bonds Issued at a Premium Terms and Definitions The interest rate paid on the face amount of a bond is called the market rate of interest is less than the contract rate of interest, the bonds will sell for this case is called a of interest. The interest rate paid on similar risk bonds is called the of interest. When the their face value. The difference between the selling price and the face amount of the bonds in Understanding the Business Transaction On January 1, 2014 Jill Company issued the following bonds maturing on December 31, 2023: Face Value Contract Rate Market rate The bonds will sell at: $3,850,000 11% 10% than their face value because the bond will pay interest If the contract rate of interest is greater than the market rate of interest, the bonds will sell for than a buyer could earn on similar risk bonds issued by another company.
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Row

1
2
3

Contract
Market
Less than
Discount
3.348.373,00
less
lower

Taxes
10% Bonds
Preferred $1 stock, $10 par
CS

EBIT
Less: Interest
Less:Taxes
Less: Preference Dividend
Earning Available for common stockholders
Number of common stock

Accounts
Cash
Discount on Bonds Payable
Bonds Payable
Cash
Discount
BP
IE
Discount
Cash

Accounts
Cash
Discount on Bonds Payable
Bonds Payable
Accounts
Interest Expense
Discount on Bonds Payable
Cash

Accounts
Cash
Premium on Bonds Payable

Bonds Payable

Accounts
Cash
Premium on Bonds Payable
Bonds Payable

Accounts
Interest Expense
Premium on Bonds Payable
Cash

Accounts

Bonds Payable
Loss on Redemption of Bonds
Discount on Bonds Payable
Cash

Accounts
Cash
Note Payable

Accounts
Interest Expense
Notes Payable
Cash

1) Issuanced of Bonds
Accounts
Cash

Discount on Bonds Payable
Bonds Payable
2)
Accounts
Interest Expense
Cash

3)
Accounts
Interest Expense
Cash

4)
Accounts
Bonds Payable
Discount on Bonds Payable

Bond Interest Expense:

Accounts
Cash
Premium on Bonds Payable
Bonds Payable

Accounts

Interest Expense
Premium on Bonds Payable
Cash

1-Mar
Accounts
Cash
Bonds Payable
1-Sep
Accounts
Interest Expense
Cash
2018, Sept 1
Accounts
Bonds Payable
Loss on Bond Retirement
Cash

Accounts
Interest Expense
Cash

2018, Sept 1
Accounts
Bonds Payable
Loss on Bond Retirement
Cash

Accounts
Cash
Note Payable

Accounts
Interest Expense
Notes Payable
Cash

Date
7/1

10/1

12/31

12/31

12/31

12/31

6/30

9/30

31-Dec

31-Dec

31-Dec

31-Dec

Jun-31

30-Sep

2)

3)

75100
15746
Selling Price
Total Discount

Accounts
Cash
Bond Discount
Bonds Payable

Row 1
Row 2
Row 3

6000
3051,4
9051,4

Accounts
Interest Expense
Discount on Bonds Payable
Cash

Row 1
Row 2
Row 3

Accounts
Interest Expense
Discount on Bonds Payable
Cash
Accounts
Bonds Payable
Cash

Row 1
Row 2
Row 3
6
7

Assets and liabilities
Balance sheet
10.000.000
At Par
Discount
Premium

Market rate: 7%
Coupon rate: 8%

PV of face:
PV of interest payments:
Selling price of bond:
Premium:

Accounts
Cash
Bonds Payable
Premium on Bonds Payable

Row
1
2
3

Cash Payment
Premiun Payable
Interest Expense

Accounts
Interest Expense
Premium
Cash

Row

Assets
Liabilities
1 No effect No effect
2 No effect –
3–
No effect

Equity

No effect
No effect

Accounts
Interest Expense
Premium
Cash

Accounts
Bonds Payable
Cash

Portion of a year
3/12

A) 62000 * .055 =
B)77000 * 0.03 * 1/12

Stays the same
Increases

Payment Date
31-May
Jun. 30
Jul. 31

Debit
206,2
credit
700
debit
interest expense
493,98

Contract...


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