Question

(b) Brookfield Inc. issued $600,000 of 9%, 10 – year bonds on June 30, 2015, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semi annually on December 31 and June 30. Determine the amount of interest expense to record if financial statements are issued on October 31, 2015. (c) On October 1, 2015, Brimley Company sold 12% bonds having a maturity value of $800,000 for $853,382 plus accrued interest, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2015, and mature January 1, 2020, with interest payable December 31 of each year. Prepare the journal entries at the date of the bond issuance and for the first interest payment. (d) Rochester Co. owes $199,800 to Simpson Inc. The debt is a 10-year, 11% note. Because Rochester Co. is in financial trouble, Simpson Inc. agrees to accept some land and cancel the entire debt. The land has a book value of $90,000 and a fair value of $140,000. Prepare the journal entry on Rochester’s books for debt settlement. (e) On December 31, 2015, Malton Company acquired a computer from Hamilton Corporation by issuing a $600,000 zero-interest-bearing note, payable in full on December 31, 2019. Malton Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a $70,000 residual value. Prepare the journal entry for the purchase on December 31, 2015 and any necessary adjusting entries relative to depreciation (use straight-line) and amortization on December 31, 2016.

Answer 1

Answer-(b):

interest expense to record if financial statements are issued on October 31, 2015 = $562,500*10%*4/12 = $18,750

Answer-(c):

Cash ($853,382 + 72,000)	925,382
Bonds payable		853,382
Interest expense ($800,000*12%*9/12)		72,000
Interest expense	93,335
Bonds payable [(800,000*12%-72,000) - (853,382*10%*3/12)]	2,665
Cash ($800,000*12%)		96,000