E14-1

(a)

(b)

e
(Classification of Liabilities) Presented below are various

account balances of K.D. L

lng Inc.

Un<lmortized premium on bonds payable, of which $3,000 will be amortized during the next year.
Bank loans payable of a winery, due March 10, 2011. (The product requires aging for 5 years before
sale.)

(c)

Serial bonds payable, $1,000,000, of which $200,000 arc due each July 31.

(d)

Amounts withheld from employees' wages for income taxes.

(e)

Notes payable due January 15, 2010.

(f)

Credit balances in customers' accounts arising from returns and allowances after collection in full
of account.

(g)

Bonds payable of $2,000,000 maturing June 30, 2009.

(h)

Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i)

Deposits made by customers who have ordered goods.

Instructions
[ndicate whether each of the items above should be classified on December 31, 2008, as a current liabil
ity, a long-term liability, or under some other classification. Consid er each one independently from all
olhcrs; that is, do not assume that all of them relate to one particular business. If the classification of some
of the items is doubtful, explain why in each case.

EXERCISE 14-1 (1520 minutes)

(a) Valuation account relating to the long-term liability, bonds payable (sometimes referred to as
an adjunct account). The $3,000 would continue to be reported as long-term.
(b) Current liability if current assets are used to satisfy the debt.
(c) Current liability, $200,000; long-term liability, $800,000.
(d) Current liability.
(e) Probably noncurrent, although if operating cycle is greater than one year and current assets
are used, this item would be classified as current.
(f) Current liability.
(g) Current liability unless (a) a fund for liquidation has been accumulated which is not classified
as a current asset or (b) arrangements have been made for refinancing.
(h) Current liability.
(i) Current liability.

E14-1
(a)

(b)

e
(Classification of Liabilities) Presented below are various

account balances of K.D. L

lng Inc.

Un<lmortized premium on bonds payable, of which $3,000 will be amortized during the next year.
Bank loans payable of a winery, due March 10, 2011. (The product requires aging for 5 years before
sale.)

(c)

Serial bonds payable, $1,000,000, of which $200,000 arc due each July 31.

(d)

Amounts withheld from employees' wages for income taxes.

(e)

Notes payable due January 15, 2010.

(f)

Credit balances in customers' accounts arising from returns and allowances after collection in full
of account.

(g)

Bonds payable of $2,000,000 maturing June 30, 2009.

(h)

Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i)

Deposits made by customers who have ordered goods.

Instructions
[ndicate whether each of the items above should be classified on December 31, 2008, as a current liabil
ity, a long-term liability, or under some other classification. Consid er each one independently from all
olhcrs; that is, do not assume that all of them relate to one particular business. If the classification of some
of the items is doubtful, explain why in each case.

E14-3

(Entries for Bond Transactions)

Presented below arc two independent situations.

1.

On January 1, 2007, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable

2.

On June 1, 2007, Garfunkel Company issued $100,000 of 12%, 10-ycar bonds dated January 1 at

quarterly on April 1, July 1, October l, and January 1.

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.

(b) The payment of interest on Jul y 1.
(c) T he accrual of interest on December 31.
E14-4

(Entries for Bond Transactions-Straight-Line)

Celine Dion Company issued $600,000 of 10%,

20-year bonds on January 1, 2008, at 102. Interest is payable semiannually on July 1 and January 1. Dion
Company uses the straight-line method of amortization for bond premium or discount.

Instructions
Prlparc the journal entries to record the following.
(a)

The issuance of the bonds.

(b)

The payment of interest and the related amortization on July 1, 2008.

(c)

The accrual of interest and the related amortization on D<.-ccmbcr 31, 2008.

EXERCISE 14-3 (1520 minutes)

1. Simon Company:
(a) 1/1/07
(b)
(c)
2.
(a)

(b)

Cash ............................................................. 200,000

Bonds Payable ...............................
200,000
7/1/07
Bond Interest Expense ...........................
4,500
($200,000 X 9% X 3/12)
Cash ...................................................
4,500
12/31/07 Bond Interest Expense ........................... 4,500
Interest Payable .............................
4,500
GarFunkle Company:
6/1/07
Cash ............................................................. 105,000
Bonds Payable ...............................
100,000
Bond Interest Expense ................
5,000
($100,000 X 12% X 5/12)
7/1/07
Bond Interest Expense ...........................
6,000
Cash ...................................................
6,000
($100,000 X 12% X 6/12)

(c) 12/31/07 Bond Interest Expense ...........................

6,000
Interest Payable ..............................

6,000

Note to instructor: Some students may credit Interest Payable on

6/1/07. If they do so, the entry on 7/1/07 will have a debit to Interest
Payable for $5,000 and a debit to Bond Interest Expense for $1,000.

E14-1
(a)

(b)

e
(Classification of Liabilities) Presented below are various

account balances of K.D. L

lng Inc.

Un<lmortized premium on bonds payable, of which $3,000 will be amortized during the next year.
Bank loans payable of a winery, due March 10, 2011. (The product requires aging for 5 years before
sale.)

(c)

Serial bonds payable, $1,000,000, of which $200,000 arc due each July 31.

(d)

Amounts withheld from employees' wages for income taxes.

(e)

Notes payable due January 15, 2010.

(f)

Credit balances in customers' accounts arising from returns and allowances after collection in full
of account.

(g)

Bonds payable of $2,000,000 maturing June 30, 2009.

(h)

Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i)

Deposits made by customers who have ordered goods.

Instructions
[ndicate whether each of the items above should be classified on December 31, 2008, as a current liabil
ity, a long-term liability, or under some other classification. Consid er each one independently from all
olhcrs; that is, do not assume that all of them relate to one particular business. If the classification of some
of the items is doubtful, explain why in each case.

E14-3

(Entries for Bond Transactions)

Presented below arc two independent situations.

1.

On January 1, 2007, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable

2.

On June 1, 2007, Garfunkel Company issued $100,000 of 12%, 10-ycar bonds dated January 1 at

quarterly on April 1, July 1, October l, and January 1.

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.

(b) The payment of interest on Jul y 1.
(c) T he accrual of interest on December 31.
E14-4

(Entries for Bond Transactions-Straight-Line)

Celine Dion Company issued $600,000 of 10%,

20-year bonds on January 1, 2008, at 102. Interest is payable semiannually on July 1 and January 1. Dion
Company uses the straight-line method of amortization for bond premium or discount.

Instructions
Prlparc the journal entries to record the following.
(a)

The issuance of the bonds.

(b)

The payment of interest and the related amortization on July 1, 2008.

(c)

The accrual of interest and the related amortization on D<.-ccmbcr 31, 2008.

EXERCISE 14-4 (1520 minutes)

(a) 1/1/08

Cash ($600,000 X 102%) ................................. 612,000

Bonds Payable ........................................
600,000
Premium on Bonds Payable ....................................12,000

(b) 7/1/08

Bond Interest Expense ................................... 29,700

Premium on Bonds Payable .........................
300
($12,000 40)
Cash ...........................................................
($600,000 X 10% X 6/12)
(c) 12/31/08 Bond Interest Expense ................................... 29,700
Premium on Bonds Payable.........................
300
Interest Payable ......................................

30,000

30,000

E14-5

(Entries for Bond Transactions-Effective Interest)

except that Celine Dion Company

uses

Assume the same information

as

in E144,

the effective interest method of <1mortization for bond premium

or discount. Assume an effective yield of 9.7705%.

Instructions

Prepare 1he journal entries to record the followi ng. (Round to the nea rest dollar.)
(a)
(b)

(c)
E14-6

The issuance of the bonds.

The payment of interest and related amortization on July I, 2008.

The accniaJ of interest and the related amortization on December 31, 2008.
(Amortization Schedules-Straight-line)

Devon Harris Company sells 10% bonds having a

maturity v<1luc of $2,000,000 for $1,855,816. The bonds are dated January 1, 2007, and matu re January 1,

2012. Interest is payable annually on January 1.

Instructions
Set up
E14 -7

schedule of interest expense and discount amortization under the stra ight-line method.

(Amortization Sc hedu le

Effe ctive Interest)

Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective interest method. (Hi11t:
The effective interest rate must be computed.)

E14-10 (Entr ies for Bond Transactions) On January 1, 2007, Aumont Company sold 12% bonds hav
ing a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The
bonds are dated January 1, 2007, and mature Januilfy 1, 2012, with interest payable December 31 of each
year. Aumont Company allocates intere s t and unamortized discount or premium on the effective i n teres t

basis.

Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for ?007-2009.
(cl

(d)

Prepare the journal entry to record the interest payment and the amortization for 2007.

Prepare the journal entry to record the interest payment and the amortization for 2009.

EXERCISE 14-5 (1520 minutes)

(a) 1/1/08

Cash ($600,000 X 102%) ................................. 612,000

Bonds Payable ........................................
Premium on Bonds Payable ...............
(b) 7/1/08
Bond Interest Expense .................................... 29,898
($612,000 X 9.7705% X 1/2)
Premium on Bonds Payable ..........................
102
Cash ............................................................
($600,000 X 10% X 6/12)
(c) 12/31/08 Bond Interest Expense ................................. 29,893
($611,898 X 9.7705% X 1/2)
Premium on Bonds Payable .......................
107
Interest Payable ...................................
Carrying amount of bonds at July 1, 2008:
Carrying amount of bonds at January 1, 2008
Amortization of bond premium
($300,000 $29,898)
Carrying amount of bonds at July 1, 2008

600,000
12,000

30,000

30,000
$612,000
(102)
$611,898

E14-5

(Entries for Bond Transactions-Effective Interest)

except that Celine Dion Company

uses

Assume the same information

as

in E144,

the effective interest method of <1mortization for bond premium

or discount. Assume an effective yield of 9.7705%.

Instructions

Prepare 1he journal entries to record the followi ng. (Round to the nea rest dollar.)
(a)
(b)

(c)
E14-6

The issuance of the bonds.

The payment of interest and related amortization on July I, 2008.

The accniaJ of interest and the related amortization on December 31, 2008.
(Amortization Schedules-Straight-line)

Devon Harris Company sells 10% bonds having a

maturity v<1luc of $2,000,000 for $1,855,816. The bonds are dated January 1, 2007, and matu re January 1,

2012. Interest is payable annually on January 1.

Instructions
Set up
E14 -7

schedule of interest expense and discount amortization under the stra ight-line method.

(Amortization Sc hedu le

Effe ctive Interest)

Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective interest method. (Hi11t:
The effective interest rate must be computed.)

E14-10 (Entr ies for Bond Transactions) On January 1, 2007, Aumont Company sold 12% bonds hav
ing a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The
bonds are dated January 1, 2007, and mature Januilfy 1, 2012, with interest payable December 31 of each
year. Aumont Company allocates intere s t and unamortized discount or premium on the effective i n teres t

basis.

Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for ?007-2009.
(cl

(d)

Prepare the journal entry to record the interest payment and the amortization for 2007.

Prepare the journal entry to record the interest payment and the amortization for 2009.

EXERCISE 14-7 (1520 minutes)

The effective-interest or yield rate is 12%. It is determined through trial anerror using Table 6-2 for the discounted value
of the principal ($1,134,860) and Table 6-4 for the discounted value of the interest ($720,956); $1,134,860
plus $720,956 equals the proceeds of $1,855,816. (A financial calculator may be used to determine the rate of 12%.)
Schedule of Discount Amortization
Effective-Interest Method (12%)
Year
(1)
Jan. 1, 2007
Dec. 31, 2007
Dec. 31, 2008
Dec. 31, 2009
Dec. 31, 2010
Dec. 31, 2011

Cash
Paid
(2)
$200,000
200,000
200,000
200,000
200,000

*$222,697.92 = $1,855,816 X .12.

**Rounded.

Interest
Expense
(3)
$222,697.92*
225,421.67
228,472.27
231,888.94
235,703.20**

Discount
Amortized
(4)
$22,697.92
25,421.67
28,472.27
31,888.94
35,703.20

Carrying
Amount of
Bonds
$1,855,816.00
1,878,513.92
1,903,935.59
1,932,407.86
1,964,296.80
2,000,000.00

E14-5

(Entries for Bond Transactions-Effective Interest)

except that Celine Dion Company

uses

Assume the same information

as

in E144,

the effective interest method of <1mortization for bond premium

or discount. Assume an effective yield of 9.7705%.

Instructions

Prepare 1he journal entries to record the followi ng. (Round to the nea rest dollar.)
(a)
(b)

(c)
E14-6

The issuance of the bonds.

The payment of interest and related amortization on July I, 2008.

The accniaJ of interest and the related amortization on December 31, 2008.
(Amortization Schedules-Straight-line)

Devon Harris Company sells 10% bonds having a

maturity v<1luc of $2,000,000 for $1,855,816. The bonds are dated January 1, 2007, and matu re January 1,

2012. Interest is payable annually on January 1.

Instructions
Set up
E14 -7

schedule of interest expense and discount amortization under the stra ight-line method.

(Amortization Sc hedu le

Effe ctive Interest)

Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective interest method. (Hi11t:
The effective interest rate must be computed.)

E14-10 (Entr ies for Bond Transactions) On January 1, 2007, Aumont Company sold 12% bonds hav
ing a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The
bonds are dated January 1, 2007, and mature Januilfy 1, 2012, with interest payable December 31 of each
year. Aumont Company allocates intere s t and unamortized discount or premium on the effective i n teres t

basis.

Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for ?007-2009.
(cl

(d)

Prepare the journal entry to record the interest payment and the amortization for 2007.

Prepare the journal entry to record the interest payment and the amortization for 2009.

EXERCISE 14-10 (1520 minutes)

(a)

January 1, 2007
Cash ...................................................................... 537,907.37
Premium on Bonds Payable ..............
Bonds Payable .......................................

(b)

Schedule of Interest Expense and Bond Premium Amortization

Effective-Interest Method
12% Bonds Sold to Yield 10%

Date

Cash
Paid

1/1/07
12/31/07
12/31/08
12/31/09
(c)

(d)

37,907.37
500,000.00

$60,000.00
60,000.00
60,000.00

Interest
Expense

Premium
Amortized

$53,790.74
53,169.81
52,486.79

$6,209.26
6,830.19
7,513.21

Carrying
Amount of
Bonds
$537,907.37
531,698.11
524,867.92
517,354.71

December 31, 2007

Bond Interest Expense ................................... 53,790.74
Premium on Bonds Payable ......................... 6,209.26
Cash ...........................................................

60,000.00

December 31, 2009

Bond Interest Expense ................................... 52,486.79
Premium on Bonds Payable ......................... 7,513.21
Cash ...........................................................

60,000.00

E14-12 (Entry for

Retirem ent of Bond; Bond Issue Costs)

On January 2, 2002, Banno Corporation

issued $1,500,000 of 10% bonds at 97 due December 31, 2011. L egal and other costs of $24,000 were in
curred in connection with the issue. Interest on the bonds is payable annually each December 31. The
$24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of
the bonds. The discount o n the bonds is also being amortized on n strnight line basis over the 10 yenrs.
-

(Stra ight-line is not

materially

different in effect from the pre ferable "interest method".)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2007, Banno called
$900,000 face amow1t of the bonds and retired them.

Instructions
Jgnoring income taxes, compute the amount of loss, if any, to be rccogniled by Banno as a result of re tiring
the $900,000 of bonds in 2007 and prepare the journal entry to record the retire ment

(AICPA adapted)
E14-13

(Entries for Reti re ment and Issuance of Bonds)

Matt Perry, Inc. had outstanding $6,000,000 of

11 'Yo bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of
1()%, 15-yeRr bonds (interest payable July 1 and January 1) at 98. A port ion of the proceeds was used to
call th e l'I % b onds a t 102 on August I. Unamortized bond discount and issue cost applica bl e to the 11 %
bonds were $120,000 and $30,000, respectively.

Instructions
Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.

El4-19

(Long-Term Debt Disclosure)

three long-term debt issues. The first is a

At December 31, 2006, Helen Reddy Company has outstanding

$2,000,000 note

payable which matures June 30, 2009. The sec

ond is a $6,000,000 bond issue which matures September 30, 2010. The third is a Sl 7,500,000 sinking fund
debenture with annual sinking fund payments of

$3,500,000

in each of the years 2008 through 2012.

Instructions
Prepare the note disclosure required by FASB Statement No. 47, "Disclosure of Long-term Obligations,"
for the long-term debt at December 31, 2006.

EXERCISE 14-12 (1520 minutes)

Reacquisition price ($900,000 X 101%)
Less: Net carrying amount of bonds redeemed:
Par value
$900,000
Unamortized discount
(13,500)
Unamortized bond issue costs
(7,200)

$909,000

879,300
Loss on redemption
$ 29,700
Calculation of unamortized discount
Original amount of discount:
$900,000 X 3% = $27,000
$27,000/10 = $2,700 amortization per year
Amount of discount unamortized:
$2,700 X 5 = $13,500
Calculation of unamortized issue costs
Original amount of costs:
$24,000 X $900,000/$1,500,000 = $14,400
$14,400/10 = $1,440 amortization per year
Amount of costs unamortized:
$1,440 X 5 = $7,200
January 2, 2007
Bonds Payable ................................................................ 900,000
Loss on Redemption of Bonds .................................
29,700
Unamortized Bond Issue Costs ......................
7,200
Discount on Bonds Payable ...........................
13,500
Cash .........................................................................
909,000

E14-12 (Entry for

Retirem ent of Bond; Bond Issue Costs)

On January 2, 2002, Banno Corporation

issued $1,500,000 of 10% bonds at 97 due December 31, 2011. L egal and other costs of $24,000 were in
curred in connection with the issue. Interest on the bonds is payable annually each December 31. The
$24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of
the bonds. The discount o n the bonds is also being amortized on n strnight line basis over the 10 yenrs.
-

(Stra ight-line is not

materially

different in effect from the pre ferable "interest method".)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2007, Banno called
$900,000 face amow1t of the bonds and retired them.

Instructions
Jgnoring income taxes, compute the amount of loss, if any, to be rccogniled by Banno as a result of re tiring
the $900,000 of bonds in 2007 and prepare the journal entry to record the retire ment

(AICPA adapted)
E14-13

(Entries for Reti re ment and Issuance of Bonds)

Matt Perry, Inc. had outstanding $6,000,000 of

11 'Yo bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of
1()%, 15-yeRr bonds (interest payable July 1 and January 1) at 98. A port ion of the proceeds was used to
call th e l'I % b onds a t 102 on August I. Unamortized bond discount and issue cost applica bl e to the 11 %
bonds were $120,000 and $30,000, respectively.

Instructions
Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.

El4-19

(Long-Term Debt Disclosure)

three long-term debt issues. The first is a

At December 31, 2006, Helen Reddy Company has outstanding

$2,000,000 note

payable which matures June 30, 2009. The sec

ond is a $6,000,000 bond issue which matures September 30, 2010. The third is a Sl 7,500,000 sinking fund
debenture with annual sinking fund payments of

$3,500,000

in each of the years 2008 through 2012.

Instructions
Prepare the note disclosure required by FASB Statement No. 47, "Disclosure of Long-term Obligations,"
for the long-term debt at December 31, 2006.

EXERCISE 14-13 (1520 minutes)

Cash ...................................................................................
Discount on Bonds Payable (.02 X $9,000,000) ...
Bonds Payable .....................................................
(To record issuance of 10% bonds)
Bonds Payable ................................................................
Loss on Redemption of Bonds ..................................
Cash ($6,000,000 X 1.02)....................................
Discount on Bonds Payable .............................
Unamortized Bond Issue Costs ......................
(To record retirement of 11% bonds)

8,820,000
180,000

6,000,000
270,000

9,000,000

6,120,000
120,000
30,000

Reacquisition price ........................................................

$6,120,000
Less: Net carrying amount of bonds redeemed:
Par value .................................................................$6,000,000
Unamortized bond discount ............................. (120,000)
Unamortized bond issue costs .......................
(30,000) 5,850,000
Loss on redemption .......................................................
$ 270,000

E14-12 (Entry for

Retirem ent of Bond; Bond Issue Costs)

On January 2, 2002, Banno Corporation

issued $1,500,000 of 10% bonds at 97 due December 31, 2011. L egal and other costs of $24,000 were in
curred in connection with the issue. Interest on the bonds is payable annually each December 31. The
$24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of
the bonds. The discount o n the bonds is also being amortized on n strnight line basis over the 10 yenrs.
-

(Stra ight-line is not

materially

different in effect from the pre ferable "interest method".)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2007, Banno called
$900,000 face amow1t of the bonds and retired them.

Instructions
Jgnoring income taxes, compute the amount of loss, if any, to be rccogniled by Banno as a result of re tiring
the $900,000 of bonds in 2007 and prepare the journal entry to record the retire ment

(AICPA adapted)
E14-13

(Entries for Reti re ment and Issuance of Bonds)

Matt Perry, Inc. had outstanding $6,000,000 of

11 'Yo bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of
1()%, 15-yeRr bonds (interest payable July 1 and January 1) at 98. A port ion of the proceeds was used to
call th e l'I % b onds a t 102 on August I. Unamortized bond discount and issue cost applica bl e to the 11 %
bonds were $120,000 and $30,000, respectively.

Instructions
Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.

El4-19

(Long-Term Debt Disclosure)

three long-term debt issues. The first is a

At December 31, 2006, Helen Reddy Company has outstanding

$2,000,000 note

payable which matures June 30, 2009. The sec

ond is a $6,000,000 bond issue which matures September 30, 2010. The third is a Sl 7,500,000 sinking fund
debenture with annual sinking fund payments of

$3,500,000

in each of the years 2008 through 2012.

Instructions
Prepare the note disclosure required by FASB Statement No. 47, "Disclosure of Long-term Obligations,"
for the long-term debt at December 31, 2006.

EXERCISE 14-19 (1015 minutes)

At December 31, 2006, disclosures would be as follows:
Maturities and sinking fund requirements on long-term debt are as follows:
2007 $
0
2008
3,500,000
2009
5,500,000 ($2,000,000 + $3,500,000)
2010
9,500,000 ($6,000,000 + $3,500,000)
2011
3,500,000

E14-16

(Entries for Zero-Interest-Bearing Notes)

On January 1, 2008, Ellen Greene Company makes

the two following acquisitions.

1.

Purchases land having a fair market value of $200,000 by issuing a 5-year, zero-interest-bearin g
promissory note i n the face amount of $337,012.

2.

Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000
(interest payable annually).

The company has to pay 11 % interest for funds from its bank.
Instructions

(a)

Record the two journal entries that should be recorded by Ellen Greene Company for the two
purchases on January 1, 2008.

(b)

Record the interest at the end of the first year on both notes using the effective interest method.

E14-17
(a)

(Imputation o f Interest)

Presented below are two independent situations:

On January 1, 2008, Robin Wright Inc. purchased land that had an assessed value of $350,000 at
the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2011, was given in
exchange. There was no established exchange price for the land, nor a ready market value for the
note. TI1e interest rate charged on a note of this type is 12%. Determine at what amount the land
should be recorded at January 1, 2008, and the interest expense to be reported in 2008 related to

this transaction.
(b)

On January 1, 2008, Sally Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise
Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was
zero-interest-bearing , Sally Field Furniture agreed to sell furniture to this customer at lower than
market price. A JO% rate of interest

is

normally charged on this type of loan. Prepare the journal

entry to record this transaction and determine the amount of interest expense to report for 2008.

EXERCISE 14-16 (1520 minutes)

(a) 1.
January 1, 2008
Land .................................................................. 200,000.00
Discount on Notes Payable .......................
137,012.00
Notes Payable ......................................

337,012.00

(The $200,000 capitalized land

cost represents the present
value of the note discounted
for five years at 11%.)
2. Equipment .......................................................
Discount on Notes Payable .......................
Notes Payable ......................................
*Computation of the discount on
notes payable:
Maturity value
Present value of $250,000 due in
8 years at 11%$250,000
X .43393
$108,482.50
Present value of $15,000
payable annually for 8 years
at 11% annually$15,000
X 5.14612
77,191.80
Present value of the note
Discount

185,674.30
64,325.70*

250,000.00

$250,000.00

(185,674.30)
$ 64,325.70

(b) 1. Interest Expense ......................................... 22,000.00

Discount on Notes Payable ..........
($200,000 X .11)
2. Interest Expense .........................................
20,424.17
($185,674.30 X .11)
Discount on Notes Payable ..........
Cash ($250,000 X .06)......................

22,000.00

5,424.17
15,000.00

E14-16

(Entries for Zero-Interest-Bearing Notes)

On January 1, 2008, Ellen Greene Company makes

the two following acquisitions.

1.

Purchases land having a fair market value of $200,000 by issuing a 5-year, zero-interest-bearin g
promissory note i n the face amount of $337,012.

2.

Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000
(interest payable annually).

The company has to pay 11 % interest for funds from its bank.
Instructions

(a)

Record the two journal entries that should be recorded by Ellen Greene Company for the two
purchases on January 1, 2008.

(b)

Record the interest at the end of the first year on both notes using the effective interest method.

E14-17
(a)

(Imputation o f Interest)

Presented below are two independent situations:

On January 1, 2008, Robin Wright Inc. purchased land that had an assessed value of $350,000 at
the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2011, was given in
exchange. There was no established exchange price for the land, nor a ready market value for the
note. TI1e interest rate charged on a note of this type is 12%. Determine at what amount the land
should be recorded at January 1, 2008, and the interest expense to be reported in 2008 related to

this transaction.
(b)

On January 1, 2008, Sally Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise
Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was
zero-interest-bearing , Sally Field Furniture agreed to sell furniture to this customer at lower than
market price. A JO% rate of interest

is

normally charged on this type of loan. Prepare the journal

entry to record this transaction and determine the amount of interest expense to report for 2008.

EXERCISE 14-17 (1520 minutes)

(a) Face value of the zero-interest-bearing note
Discounting factor (12% for 3 periods)
Amount to be recorded for the land at January 1, 2008
Carrying value of the note at January 1, 2008
Applicable interest rate (12%)
Interest expense to be reported in 2008
(b)

January 1, 2008
Cash ........................................................................
Discount on Notes Payable .............................
Notes Payable ...........................................
Unearned Revenue ..................................

*$5,000,000 ($5,000,000 X .68301) = $1,584,950

Carrying value of the note
at January 1, 2008
Applicable interest rate (10%)
Interest expense to be
reported for 2008
**$5,000,000 $1,584,950 = $3,415,050

$3,415,050**
X
.10
$ 341,505

$550,000
X .71178
$391,479
$391,479
X
.12
$ 46,977
5,000,000
1,584,950

5,000,000
1,584,950*