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CHAPTER 16 ASSIGNMENT

Instructions: Complete the problems below. This assignment can be completed in either: Microsoft Excel, Word, or hand-written and scanned in PDF format. I prefer Microsoft Excel or Word but will not dock points for PDF format.

PART A. For problems 1-5: On January 1, 2013, the company purchases ten 6%, 5-year, $10,000 bonds for $105,000, including brokerage fees of $2,000. The bonds pay interest semi-annually on July 1 and January 1. Prepare the journal entries for the following:

1. Purchase of the bonds.

2. Receipt of interest on July 1, 2013.

3. Year-end accrual of interest on December 31, 2013.

4. Receipt of interest on January 1, 2014.

5. On January 1, 2016, the company sells the bonds, after receiving interest due, for $108,000.

PART B. For problems 6-9: On January 1, 2013, the company purchases 40% of the common stock of A Corp. for $300,000. Prepare the journal entries for the following:

6. Purchase of the stock.

7. A Corp. declares and pays the company a $30,000 cash dividend on July 1, 2013.

8. On December 31, 2013, A Corp. reports net income of $80,000.

9. What amount would the company report as Stock Investments on its balance sheet as of December 31, 2013?

PART C. For problems 10-13: On January 1, 2013, the company purchases 10,000 shares (10% ownership) of the common stock of B Corp. for $5 per share plus brokerage fees of $1,000. Prepare the journal entries for the following:

10. Purchase of the stock.

11. B Corp. declares and pays the company a $5,000 dividend on July 1, 2013.

12. On December 31, 2013, B Corp. reports net income of $100,000.

13. On January 1, 2014, the company sells the stock for $40,000.

PART D. For problems 14-15: Assume the company owns 10% of the stock in C Corp. The current cost on the company’s books for the investment is $10,000. Prepare the journal entries for the following (separate situations):

14. The market value on December 31 is $12,000 and the company considers them trading securities.

15. The market value on December 31 is $8,000 and the company considers them available-for-sale securities.

PART E. For problems 16-25: Identify which section of the classified balance sheet each of the following belongs. (Be specific, simply stating “Assets” is not a correct answer. Instead, the answer may be “Property, plant, and equipment”)

16. Market adjustment – trading security

17. Unrealized gain on available-for-sale security

18. Unrealized loss on trading security

19. Common stock

20. Stock Investment (less than 20% ownership)

21. Revenue from Stock Investment

22. Loss on Sales of Stock Investment

23. Dividend Revenue

24. Debt Investments

25. Cash

CHAPTER 15 ASSIGNMENTS

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I suggest you re-read this chapter and take notes. Use this assignment to help you learn from your mistakes. Let me know if you need any help.

Instructions: Complete the problems below. This assignment can be completed in either: Microsoft Excel, Word, or hand-written and scanned in PDF format.

PART A. For problems 1-4: On January 1, the company issues $500,000 of ten-year, 8% bonds at 100. The bonds pay interest semi-annually on

July 1

and January 1. Prepare journal entries for the following:

1. Issuance of the bonds on January 1.

Jan 1

Cash $500,000

Bonds Payable $500,000

2. Payment of interest on July 1.

July 1

-1 Should debit “interest Expense”

Interest Payable $20,000

Cash $20,000

3. Accrual of January 1 interest on December 31.

Dec 31

Interest Payable $20,000

-2 Should debit “interest Expense” and credit “interest payable”

Cash $20,000

(Being accrual of Jan 1 interest on Dec. 31)

4. Payment of interest on January 1 accrued on December 31.

Dec 31
Interest Payable $20,000

Cash $20,000

(Being payment of interest on Jan 1 accrued on Dec 31)

PART B. For problems 5-6: On January 1, the company issues $200,000 of two-year, 10% bonds at 105. The bonds pay interest annually on January 1.

5. Prepare the journal entry for issuance on January 1.

-2 The bonds are issued at 105, which means that they were sold for 200,000 X 105% = 210,000. Entry should debit cash for 210,000; credit bonds payable for 200,000 and credit premium on bonds payable for 10,000.

Jan 1

Cash $200,000

Bonds Payable $200,000

6. Compute the total cost of borrowing for the bonds.

-1 Missed the last step; subtracting the premium (10,000). Total cost = $30,000

$40,000 = 10% * 200,000 * 2yrs
PART C. For problems 7-8: On January 1, the company issues $300,000 in five-year, 5% bonds at 96. The bonds pay interest annually on January 1.
7. Prepare the journal entry for issuance on January 1.-2 The bonds are issued at 96, which means that they were sold for 300,000 X 96% = 288,000. Entry should debit cash for 288,000 and debit discount on bonds payable for 12,000; credit bonds payable for 300,000.
Jan 1
Cash $300,000
Bonds Payable $300,000
8. Compute the total cost of borrowing for the bonds.-1 Missed the last step; adding the discount (12,000). Total cost = $87,000

$75,000= 5%*300,000*5yrs
PART D. For problems 9-11: On January 1, the company issues $100,000 in two-year, 8% bonds at 95. The bonds pay interest annually on January 1.
9. Prepare the journal entry assuming retirement at maturity.
Dec 31
Cash $100,000-2 Retirement of the bonds at maturity is always a debit to Bonds Payable for the face value (100,000) and a credit to cash for the face value (100,000).
Interest Accrued $8,000
To Bank $108,000
(Total cost of the bonds $16,000 = 8%*100,000*2)
10. Prepare the journal entry assuming retirement one year before maturity.
Dec 31
Cash $100,000-2 Debit bonds payable for 100,000, debit loss on bond 2500; credit discount of bonds payable 2500, credit cash 100,000.
Interest Accrued $8,000
To Bank $108,000
11. Prepare the journal entry assuming the bonds are converted into 10,000 shares of $5-par value common stock at maturity. The fair market value of the stock at the time of the conversion is $85,000.
Dec 31
Cash $100,000-2 Debit bonds payable for 100,000; credit common stock 50,000, credit paid-in-capital in excess – common stock 50,000
Interest Accrued $8,000
To Share Capital $50,000
To Securities Premium $50,000
To Bank $8,000
PART E. For problems 12-13: On January 1, the company issues a $200,000, 5%, 30-year mortgage note for new land. The terms call for annual payments on January 1 of $13,010.
12. Prepare the journal entry for the issuance of the mortgage.
Jan 1-2 Debit Cash 200,000, credit mortgage payable 200,000
Land $200,000
To 5% Note $200,000
13. Prepare the journal entry for the accrual of the first payment on December 31.
Dec 31-2 Debit Interest Expense $10,000 (200,000 X 5%); credit interest payable 10,000.
Interest Payable $13,010
To Accrued Interest $13,010
PART F. For questions 14-15: Interest expense = $3,000.00; Total Assets = $25,000.00; Total Debt = $10,000.00; Net Income = $5,000; Income Taxes = $2,500.00
14. Calculate percentage of debt to total assets
Interest Expense $3,000
Total Assets $25,000
Total Debts $10,000
Net Income $5,000
Income Tax $2,500
40% = Total debts / Total Assets
15. Calculate times interest earned
EBIT/Interest
=(Net Income + Tax)/ Interest-1 (Net income + interest + tax) Interest = 5000+2500+3000 = 10,500 / 3000 = 3.5 times
= 2.5
PART G. For problems 16-20: Complete the following:
16. The company enters into a capital lease for equipment on January 1. The present value of the payments is $50,000, which is the fair value of the equipment. Prepare the journal entry for the transaction.-1 Debit Leased Asset-Equipment 50,000; credit lease liability 50,000
Lease A/C Dr $50,000
To Lease Receivable $50,000
17. – 20. List the four conditions that can result in a lease being classified as a capital lease.
(a) If the lease life exceeds 75% of the life of the asset
(b) If there is a transfer of ownership to the lessee at the end of the lease term
(c) If there is an option to purchase the asset at a “bargain price” at the end of the lease term.
(d) If the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset.

1.) Cash $105,000

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-2 Debit: Debt Investments for 105,000
Credit: Cash for 105,000

Debt Investments $100,000

Premium on Bond $3,000

Brokerage $2,000

2.) Cash $3,000

Interest Revenue $3,000

-2 Debit account should be “Interest Receivable”, credit account should be “Interest Revenue”.

3.) Interest Accrued $3,000

Profits/Loss $3,000

4.) Cash $3,000

-1 Credit account should be “Interest Receivable”

Interest Revenue $3,000

5.) Cash $108,000

-2 Debit: Cash for 108,000
Credit: Debt Investments for 105,000
Credit: Gain on Sale of Debt Investments for 3,000

Investments in bonds $100,000

Premium on sale of bonds $8,000

-1 Debit account should be “Stock Investments”

6.) Stock Accounts $300,000

Cash $300,000

7.) Cash $30,000

-1 Credit account should be “Stock Investments”

To Dividend A/C $30,000

8.) (No entry required)

-2 Should be 302,000 (300,000 -30,000 + 32,000)

-2 Debit: Stock Investments for 32,000
Credit: Revenue from Stock Investments for 32,000

9.) $300,000

-2 Debit: Stock Investments for 51,000
Credit: Cash for 51,000

10.) Shares Account $50,000

Brokerage $1,000

Cash $5,100

11.) Cash $5,000

-1 Credit account should be “Dividend Revenue”

To dividend Accounts $5,000

12.) No entry

13.) Bank Account $40,000

-2 Debit: Cash for 40,000
Debit: Loss on Sale of Stock Investment for 11,000
Credit: Stock Investment for 51,000

Loss on Sale $10,000

To Stock Accounts $50,000

14.) Investment Accounts $2,000

-2 Debit: Market Adjustment – Trading for 2,000
Credit: Unrealized Gain – Income for 2,000

Revaluation Reserve Accounts $2,000

15.) No entry since the company considers them available for sale securities.

-2 Debit: Unrealized Loss – Equity for 2,000
Credit: Market Adjustment – Available-for-Sale for 2,000

16.) Investments

17.) Profits/Loss

18.) Profits/Loss

19.) Stock

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#17) Stockholders’ Equity – Balance Sheet

#18) Other Expenses and Losses – Income Statement

#19) Stockholders’ Equity – Balance Sheet

#21) Other Revenues and Gains – Income Statement

#22) Other Expenses and Losses – Income Statement

#23) Other Revenues and Gains – Income Statement

20.) Investment

21.) Profits/Loss

22.) Profits/Loss

23.) Profits/Loss

24.) Investments

25.) Current Assets