143) On January 2, 2010, Pannabaker Corporation issued $400,000, five-year, 10% bonds when the market rate...

143) On January 2, 2010, Pannabaker Corporation issued $400,000, five-year, 10% bonds when the market rate of interest was 12%. The bonds pay interest annually on December 31. Pannabaker Corporation uses the effective-interest method of amortization and has a year-end of December 31.

(Note: present value tables required.)

a) Prepare the journal entry on January 2, 2010, to issue the bonds. b) Prepare the journal entry on December 31, 2010, to record the first annual interest payment and the amortization of the premium or discount.

144) Calculate the cash proceeds from the following issuances of bonds. All situations are independent of each other and all the bond issuances pay interest annually.

Note: present value tables required.

a) $100,000, five-year, 10% bonds issued when the market rate is 8% b)$50,000, 10-year, 8% bonds issued when the market rate is 12% c) $200,000, 10-year, 9% bonds issued when the market rate is $12% d) $100,000, five-year, 12% bonds issued when the market rate is 8%

145) Warren Corporation signs an agreement on January 2, 2010, to lease delivery equipment for a five-year period. The current market value of the delivery equipment on January 2, 2010, is $225,000. The lease agreement calls for annual payments of $50,040. The first payment is made on January 2, 2010, all other payments are made on December 31 of each year. The lease agreement calls for an 8% interest rate. The estimated remaining life of the delivery equipment is six years. Ownership of the delivery equipment will transfer to Warren Corporation at the end of the lease term.

Note: present value tables required.

a) Prepare the journal entry on January 2, 2010, to record the lease agreement and make the first lease payment. b) Prepare the entry on December 31, 2010, to record the second lease payment and the accrual of interest.

Solutions

Expert Solution

Solution:

143

Face Value of the Bond	400000
Effective Interest	12%
Coupon rate	10%
Years to Maturity	5
Coupon payment	4000

*Present Value of Face (400000.56743)**		$2,26,971
*Present Value of Interest Payments (4000003.6048)**		$1,44,191
	Issue Price	$3,71,162
Face Value of Bond		$4,00,000
Initial Amount of Discount/(Premium)		$28,838

Journal Entries:

Cash	371161.79
Discount on Bonds Payable	28838.21
Bonds Payable		400000
To record the issue of 10% bonds of FV $400,000 at a discount. The bond is issued at a discount as the market rate (12%) is higher than the coupon rate of( 10%)

Dec-31	Interest Expense	44539.41
	Discount on Bonds Payable		4539.41
	Cash		40000

Notes:

Interest Expense = 371161.79 *12% = $44539.41

Discount Amortized = Interest Expense - Coupon payment

= $44539.41-$40000 = $4539.41

PS: Please post as separate questions. Have answered the first one.

ekkarill92 answered 7 months ago

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