P15-2A Kusmaul Electric sold $500,000, 10%, 10-year bonds on January 1, 2010.

The
bonds were dated January 1 and paid interest on January 1 and July 1. The bonds were
sold at 104. Hint: Prepare entries to record issuance of bonds, interest accrual, and bond
redemption. (SO 2, 3, 6) Instructions (a) Prepare the journal entry to record the issuance
of the bonds on January 1, 2010. (b) At December 31, 2010, the balance in the Premium
on Bonds Payable account is $18,000. Show the balance sheet presentation of accrued
interest and the bond liability at December 31, 2010. (c) On January 1, 2012, when the
carrying value of the bonds was $516,000, the company redeemed the bonds at 105.
Record the redemption of the bonds assuming that interest for the period has already been
paid. Loss $9,000
(a)
Jan.

2010
Cash ($500,000 X 1.04)........................................
Bonds Payable............................................

520,000

500,000
Premium on Bonds Payable........................
20,000
(b)

Current Liabilities
Bond interest payable
($500,000 X 10% X 1/2)...............................................
25,000
Long-term Liabilities
Bonds payable, due 2020..................................................
Add: Premium on bonds payable...................................
$518,000

(c)
Jan.

2012
Bonds Payable......................................................
Premium on Bonds Payable................................
Loss on Bond Redemption..................................
Cash ($500,000 X 1.05)........................................

$500,000
18,000

500,000**
16,000**
9,000*

525,000
*($525,000 $516,000)

P15-3A Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December
31, 2009. The proceeds from the note are to be used in financing a new research

laboratory. The terms of the note provide for semiannual installment payments, exclusive
of real estate taxes and insurance, of $29,433. Payments are due June 30 and December
31. Hint: Prepare installment payments schedule and journal entries for a mortgage note
payable. (SO 4) Instructions (a) Prepare an installment payments schedule for the first 2
years. (b) Prepare the entries for (1) the loan and (2) the first two installment payments.
June 30 Mortgage Notes Payable $13,433 (c) Show how the total mortgage liability
should be reported on the balance sheet at December 31, 2010. Current liability2010:
$29,639
(a)

Semiannual
Interest Period
Issue Date
1
2
3
4

(b)
Dec.

31

Cash
Payment
$29,433
29,433
29,433
29,433

Interest
Expense
$16,000
15,463
14,904
14,323

Reduction of
Principal

Principal
Balance

$13,433
13,970
14,529
15,110

$400,000
386,567
372,597
358,068
342,958

2009
Cash .............................................................400,000
Mortgage Notes Payable................................

400,000

June

30

2010
Interest Expense.......................................................
Mortgage Notes Payable..........................................
Cash.................................................................

16,000
13,433

29,433
Dec.

31

Interest Expense.......................................................
Mortgage Notes Payable..........................................
Cash.................................................................

15,463
13,970

29,433

(c)

12/31/10
Current Liabilities
Current portion of mortgage notes payable
**

$ 29,639

Long-term Liabilities
Mortgage notes payable, due 2019
**

$342,958

**($14,529 + $15,110)
**($372,597 $14,529 $15,110)
P15-4A Presented below are three different lease transactions that occurred for Kear Inc.
in 2010. Assume that all lease contracts start on January 1, 2010. In no case does Kear
receive title to the properties leased during or at the end of the lease term. Lessor Jansen
Delivery Flood Co. Louis Auto Type of property Computer Delivery equipment
Automobile Yearly rental $ 6,000 $ 4,200 $ 3,700 Lease term 6 years 4 years 2 years
Estimated economic life 7 years 7 years 5 years Fair market value of lease asset $33,000
$19,000 $11,000 Present value of the lease rental payments $31,000 $13,000 $ 6,400
Bargain purchase option None None None Hint: Analyze three different lease situations
and prepare journal entries. (SO 2) Instructions (a) Which of the leases above are
operating leases and which are capital leases? Explain. (b) How should the lease
transaction for Flood Co. be recorded in 2010? (c) How should the lease transaction for
Jansen Delivery be recorded on January 1, 2010?
(a)

Kear Inc. should record the Jansen Delivery lease as a capital lease because:
(1) the lease term is greater than 75% of the estimated economic life of the
leased property and (2) the present value of the lease payments is 90% or more
of the fair market value of the computer. It should be noted that only one
condition needs to be met to require capitalization.
Both the Flood Co. and Louis Auto leases should be reported as operating leases
because none of the four conditions is met to require treatment as a capital lease.

(b)

The Flood Co. lease is an operating lease. The entry to record the lease
payment in 2010 therefore is as follows:
Rent Expense........................................................................................
Cash............................................................................................
4,200

(c)

4,200

The Jansen Delivery lease is a capital lease. The entry to record the capital lease
on January 1, 2010 therefore is as follows:
Leased AssetComputer....................................................................

31,000

Lease Liability............................................................................
31,000
*P15-5A On July 1, 2010, Atwater Corporation issued $2,000,000 face value, 10%, 10year bonds at $2,271,813. This price resulted in an effective-interest rate of 8% on the
bonds. Atwater uses the effective-interest method to amortize bond premium or discount.
The bonds pay semiannual interest July 1 and January 1. Hint: Prepare entries to record
issuance of bonds, payment of interest, and amortization of bond premium using
effective-interest method. (SO 2, 8) Instructions (Round all computations to the nearest
dollar.) (a) Prepare the journal entry to record the issuance of the bonds on July 1, 2010.
(b) Prepare an amortization table through December 31, 2011 (3 interest periods) for this
bond issue. (c) Prepare the journal entry to record the accrual of interest and the
amortization of the premium on December 31, 2010. Amortization $9,127 (d) Prepare the
journal entry to record the payment of interest and the amortization of the premium on
July 1, 2011, assuming no accrual of interest on June 30. Amortization $9,493 (e) Prepare
the journal entry to record the accrual of interest and the amortization of the premium on
December 31, 2011. Amortization $9,872
(a)
July

2010
Cash ....................................................2,271,813
Bonds Payable..........................................

2,000,000
Premium on Bonds
Payable..................................................
271,813
(b)

ATWATER CORPORATION
Bond Premium Amortization
Effective-Interest MethodSemiannual Interest Payments
10% Bonds Issued at 8%

Semiannual
Interest
Periods
Issue date
1
2
3

(A)

(B)

Interest
to Be
Paid

Interest
Expense

$100,000
100,000
100,000

$90,873
90,507
90,128

(C)
Premium
Amortization
(A) (B)

(D)
Unamortized
Premium
(D) (C)

(E)
Bond
Carrying
Value
($2,000,000 + D)

$9,127
9,493
9,872

$271,813
262,686
253,193
243,321

$2,271,813
2,262,686
2,253,193
2,243,321

(c)

Dec.

31

Bond Interest Expense

($2,271,813 X 4%)..........................................
Premium on Bonds Payable..............................
Bond Interest Payable
($2,000,000 X 5%)................................

90,873
9,127

100,000
(d)

2011
July

Bond Interest Expense

[($2,271,813 $9,127) X 4%]........................
Premium on Bonds Payable..............................
Cash...........................................................

90,507
9,493

Bond Interest Expense

[($2,262,686 $9,493) X 4%]........................
Premium on Bonds Payable..............................
Bond Interest Payable..............................

90,128
9,872

100,000
(e)

Dec.

100,000

31