Ac551 Homework Essay

E14-3 (Entries for Bond Transactions) Presented below are two independent situations.
1. On January 1, 2012, Divac Company issued $300,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1.
2. On June 1, 2012, Verbitsky Company issued $200,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.
Instructions
For each of these two independent situations, prepare journal entries to record the following. (a) The issuance of the bonds.
Divac(1) Cash $300,000 Bonds Payable $300,000

Verbitsky(2) Cash 204,000 Bonds Payable 204,000 Interest Expense 4,000 (200,000 x .12 x 2/12) (b) The payment of interest on July 1.
(1)Interest Expense 13,500 (300000 x .09 x ½) Cash 13,500
(2)Interest Expense 12,000 (200000 x .12 x ½) Cash 12,000 (c) The accrual of interest on December 31.
(1)Interest Expense 40,000 Interest Payable 40,000

(2)Interest Expense 13,500 Interest Payable 13,500

E14-7 (Amortization Schedules—Straight-Line) Spencer Company sells 10% bonds having a maturity value of $3,000,000 for $2,783,724. The bonds are dated January 1, 2012, and mature January 1, 2017. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)
Discount = 3,000,000 – 2,783,724 = 216,276
Effective interest rate = 300000/2,783,724 =approx. 12%
Carrying amount = 2,783,724 Number of periods | $ 5.00 | | | Present value | $ (2,783,724.00) | | | Interest Payment | $ 300,000.00 | | | Future value | | $ 3,000,000.00 | | | | | | | | 12.000% | | | | | Date | Cash Paid |