Unit 6
Chapter 14
14-2 ANSWER:
1)
Par Value
$1,000
Coupon Rate
10%
Term
10
Current Yield
12%
Interest
$100
Price?
PV of Interest
$565
PV of Bond's Value
$322
Price of Bond
$887
2)
Par Value
$1,000
Coupon Rate
5%
Current Yield
6%
Term
20
Interest
$50
PV of Interest
$573
PV of Bond's Value
$312
Price of bond
$885
3)
Par Value
$1,000
Coupon Rate
6%
Current yield
5%
Term
20
Interest
$60
PV of Interest
$748
PV of Bond's Value
$377
Price of bond
$1,125
4)
Par Value
$1,000
Coupon Rate
6%
Current yield
5%
Term
40
Interest
$60
PV of Interest
$1,030
PV of Bond's Value
$142
Price of bond
$1,172
5)
Par Value
$1,000
Coupon Rate
6%
Current yield
6%
Term
40
Interest
$60
PV of Interest
$903
PV of Bond's Value
$97
Price of bond
$1,000
14-16
Required:
2. Prepare a journal entry to correct the error.
3. What other step(s) would be taken in connection with the error?
Requirement 1
Interest expense
xxx
Note payable (difference)
xxx
Cash
xxx
Requirement 2
Retained earnings (overstatement of 2009-10 income)
85,000
Note payable (understatement determined above)
85,000
Requirement 3
14-19
Company A purchased a supply of electronic components from Entel Corporation on November 1, 2011. In payment for the $27 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%.
Q: Prepare the following journal entries for Company A.
First for the purchase of the components on November 1, 2011,
[Component Inventory]
[Notes Payable]
Prepare the journal entry for the first installment payment on November 30, 2011.
[Interest Expense]
[Note payable]
[Cash]
Solution: Computation of the Journal Entries
Particulars
Amount
Amount
1/11/2011
LCD Electronic Components A/c-------Dr
$27,000,000
To Note Payable A/c
$27,000,000
30/11/2011
Interest Expenses A/c--------Dr
$270,000.00
Note Payable A/c--------Dr
$2,128,917.29
To Cash A/c
$2,398,917.29
30/11/2011
Interest Expenses A/c--------Dr
$270,000.00
Note Payable A/c--------Dr
$2,128,917.29
To Cash A/c
$2,398,917.29
Computation of the amount of interest expense that LCD will report in
its income statement for the year ended December 31, 2011
Total Amount paid in 12 installments
$28,787,007.54
Less: LCD Cost
$27,000,000.00
Total Interest Amount
$1,787,007.54
Income statement interest reported
November Interest
$270,000.00
December Interest
$248,710.83
Total interest should be reported in Income statement
$518,710.83
Hence Total interest should be reported in Income statement is
$518,710.83
Wilkins Food Products, Inc.
, acquired a packaging machine from Lawrence Specialist
Corporation. Lawrence completed construction of the machine on January 1, 2009. In
payment for the machine Wilkins issued a three-year installment note to be paid in there
equal payments at the end of each year. The payments include interest at the rate of
10%.
Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins