Question

A.

Entries for Issuing and Calling Bonds; Gain

Emil Corp. produces and sells wind-energy-driven engines. To finance its operations, Emil Corp. issued $1,823,000 of 15-year, 14% callable bonds on May 1, 20Y1, at their face amount, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year.

Accounts payable/bonds payable/cash/gain on redemption of bonds/interest expense/loss of redemption/interest expense/interest payable/

Journalize the entries to record the following selected transactions:

20Y1
May 1	Issued the bonds for cash at their face amount.
Nov. 1	Paid the interest on the bonds.
20Y5
Nov. 1	Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.)

B.

Times interest earned

The following data were taken from recent annual reports of Caliber Company, which operates a low-fare airline service to more than 50 cities in the United States:

	Current Year		Preceding Year
Interest expense	$71,000		$78,000
Income before income tax	553,800		475,800

a. Determine the times interest earned ratio for the current and preceding years. Round to one decimal place.

Current year ?
Preceding year ?

b. Although Caliber Company had enough earnings to pay interest in the preceding year, the (improvement or reduction) in this ratio will be (unwelcomed or welcomed) by the

debtholders.

C.

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method

Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $6,000,000 of 6-year, 6% bonds at a market (effective) interest rate of 3%, receiving cash of $6,981,677. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, 2016. For a compound transaction, if an amount box does not require an entry, leave it blank.

b. Journalize the entry to record the first interest payment on October 1, 2016, and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank.

c. Why was the company able to issue the bonds for $6,981,677 rather than for the face amount of $6,000,000?

The market rate of interest is (greater than/less than) the contract rate of interest.

Issued the bonds for cash at their face amount.

20Y1, May 1

Paid the interest on the bonds.

20Y1, Nov. 1

Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.) For a compound transaction, if an amount box does not require an entry, leave it blank.

20Y5, Nov. 1

Answer 1

Times interest earned ratio = (Income before income tax+Interest )/Interest expense

So, for the Current year = ($553,800+$71,000)/($71000) i.e. 8.8

For preceding year = ($475,800+$78,000)/($78,000) i.e. 7.1

b) Although Caliber Company had enough earnings to pay interest in the preceding year, the improvement in this ratio will be welcomed by the debtholders.

C) a. Apr 1. Cash account Debit $ 6,981,677

To, premium on bonds a/c Credit $9,81,677

To, Bonds payables a/c Credit $6,00,0000

(Being bonds issued at premium)

b. Oct 1. Interest expense debit $ 130,916

Premium on bonds debit $ 49,084 (981,677/20)

To, cash account. Credit. $1,80,000

(6,00,000*6%*6/12)

c. The company issue the bonds for $6,981,677 instead of$6,000,000 because the market rate of interest lower than the contract rate of interest., Issued the bonds for cash at their face value.

May 1. Interest expense debit $180,000

To cash account credit $1,80,,000

(Premium on bonds amortized on 20 semiannual years)

Nov 1. Bonds payable Debit $6,000,000

Earning from bonds credit (6,000,000-5,820,000)=$180,000

To cash account credit (6,000,000*.97). = $5,820,000