bond issue price assuming a market interest

TEST 2

Question 1:

On September 1, 2017, Messner Corp. issued a $250,000, 12%, four-year bond. Interest is payable semi-annually beginning March 1, 2018.

Required:

1. Calculate the bond issue price assuming a market interest rate of 10% on the date of issue.
2. Using the effective interest method, prepare an amortization schedule.

Question 2:

Refer to the amortization schedule prepared in Question 1. Assume a January 31 year-end.

Required:

Part 1

Record the following entries:

1. Issuance of the bonds on September 1, 2017
2. Adjusting entry to accrue bond interest and premium amortization on January 31, 2018
3. Payment of interest on March 1, 2018

Part 2

Show how the bond will appear on the balance sheet under non-current liabilities at January 31, 2020.

Question 3:

On February 1, 2017, Fireside Corp. issued a $700,000, 8%, two-year bond. Interest is payable quarterly each May 1, August 1, November 1, and February 1.

Required:

Part 1

1. Calculate the bond issue price assuming a market interest rate of 16% on the date of issue.
2. Using the effective interest method, prepare an amortization schedule.
3. Record the entry for the issuance of the bond on February 1; the adjusting entry to accrue bond interest and related amortization on March 31, 2017, Fireside Corp.’s year-end; and the payment of interest on May 1, 2017.
4. Record the entry for the retirement of the shares at 101, on February 1, 2018, one year early, and after the interest payment.

Part 2

1. Calculate the bond issue price assuming a market interest rate of 12% on the date of issue.
2. Using the effective interest method, prepare an amortization schedule.
3. Record the entries for the issuance of the bond on February 1; the adjusting entry to accrue bond interest and related amortization on March 31, 2017, Fireside Corp.’s year-end; and the payment of interest on May 1, 2017.

Question 4:

Peerless Carpet Corp. leased a machine on January 1, 2017, under a contract calling for six annual payments of $50,000 on December 31, 2017 through 2022. The machine becomes the property of the lessee after the sixth payment. The machine was predicted to have a service life of seven years and no residual value, and the interest rate available to Peerless for equipment loans was 9% on the day the lease was signed. The machine was delivered on January 8, 2017, and was immediately placed in service.

Required:

1. Determine the initial net liability created by the lease and the cost of the leased asset.
2. Prepare a table showing the calculation of the amount of interest expense allocated to each year the lease is in effect and the carrying amount of the liability at the end of each of those years.
3. Prepare the entry to record the leasing of the machine.
4. Prepare entries that would be made on December 31, 2018, to record the annual depreciation on a straight-line basis, and the recording of the lease payment. Also show how the machine and the lease liability should appear on the December 31, 2018, balance sheet.

Question 5:

Dimensional Media Inc. has a December 31 year-end. It showed the following partial amortization schedules regarding its two bond issues:

Bond Issue 1

Bond Issue 2

Required:

Answer the following for each bond issue:

1. Were the bonds issued at a premium and/or discount?
2. Journalize the issuance of bond issue 1 and 2 on September 1, 2018, and May 1, 2017, respectively.
3. What is the contract interest rate for each bond issue?
4. What was the market interest rate at issuance for each bond?
5. Interest of how much is paid how often for each bond issue?
6. What is the term of each bond issue?
7. Show how each of the bonds would appear on the balance sheet at December 31, 2022.
8. Calculate the total bond interest expense that would appear on the income statement for the year ended December 31, 2023.
9. Independent of (a) through (h), assume both bond issues were retired on December 1, 2022, at 101. Record the entries.