CHAPTER%2014%20-%20SOLUTIONS%20TO%20PROBLEMS

# CHAPTER%2014%20-%20SOLUTIONS%20TO%20PROBLEMS -...

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SOLUTIONS TO PROBLEMS PROBLEM 14-1 (a) The bonds were sold at a discount of \$5,651. Evidence of the discount is the January 1, 2000 book value of \$94,349, which is less than the maturity value of \$100,000 in 2009. (b) The interest allocation and bond discount amortization are based upon the effective-interest method; this is evident from the increasing interest charge. Under the straight-line method the amount of interest would have been \$11,565.10 [\$11,000 + (\$5,651 ÷ 10)] for each year of the life of the bonds. (c) The stated rate is 11% (\$11,000 ÷ \$100,000). The effective rate is 12% (\$11,322 ÷ \$94,349). (d) January 1, 2000 Cash. ......................................................................................... ................................................................................................... 94,349 Discount on Bonds Payable. ................................................... 5,651 Bonds Payable. ............................................................. 100,000 (e) December 31, 2000 Bond Interest Expense. ........................................................... 11,322 Discount on Bonds Payable. ....................................... 322 Interest Payable. ........................................................... 11,000 (f) January 1, 2007 (Interest Payment) Interest Payable. ....................................................................... 11,000 Cash. .............................................................................. 11,000 December 31, 2007 Bond Interest Expense. ........................................................... 11,712 Discount on Bonds Payable. ....................................... 712 Interest Payable. ........................................................... 11,000

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PROBLEM 14-2 (a) Present value of the principal \$1,500,000 X .38554 (PV 10, 10% ) \$ 578,310 Present value of the interest payments \$157,500* X 6.14457 (PVOA 10, 10% ) 967,770 Present value (selling price of the bonds) \$1,546,080 *\$1,500,000 X 10.5% = \$157,500 Cash. ......................................................................................... ................................................................................................... 1,496,080 Unamortized Bond Issue Costs. ............................................. 50,000 Bonds Payable. ............................................................. 1,500,000 Premium Bonds Payable. ............................................ 46,080 (b) Date Cash Paid Interest Expense Premium Amortization Carrying Amount of Bonds 1/1/05 \$1,546,080 1/1/06 \$157,500 \$154,608 \$2,892 1,543,188 1/1/07 157,500 154,319 3,181 1,540,007 1/1/08 157,500 154,001 3,499 1,536,508 1/1/09 157,500 153,651 3,849 1,532,659 (c) Carrying amount as of 1/1/08 \$1,536,508 Less: Amortization of bond premium (3,849 ÷ 2) 1,925 Carrying amount as of 7/1/08 \$1,534,583 Reacquisition price \$800,000 Carrying amount as of 7/1/08 (1,534,583 ÷ 2) (767,292 ) Loss \$ 32,708
PROBLEM 14-2 (Continued) Entry for accrued interest

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CHAPTER%2014%20-%20SOLUTIONS%20TO%20PROBLEMS -...

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