Exercise 14-1

Determine the
price of bonds;
EXERCISES
issuance; effective
interest

Exercise 14-2
Convertible bonds
LO 14-5
Text: E 14-24

LO 14-2
Text: E 14-3

Ticket, Inc. issued 10% bonds, dated January 1, with a face amount of $240
million on January 1, 2016. The bonds mature in 2025 (10 years). For bonds of
similar risk and maturity the market yield is 12%. Interest is paid semiannually
on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record their issuance by Ticket on January 1,
2016.
3. Prepare the journal entry to record interest on June 30, 2016 (at the effective
rate).
4. Prepare the journal entry to record interest on December 31, 2016 (at the
effective rate).
On January 1, 2016, Schmidt Security issued $60 million of 9%, 10-year
convertible bonds at 102. The bonds pay interest on June 30 and December 31.
Each $1,000 bond is convertible into 40 shares of Schmidt's $1 par common
stock. Facial Mapping Company purchased 10% of the issue as an investment.
Required:
1. Prepare the journal entries for the issuance of the bonds by Schmidt and the
purchase of the bond investment by Facial Mapping.
2. Prepare the journal entries for the June 30, 2018, interest payment by both
Schmidt and Facial Mapping assuming both use the straight-line method.
3. On July 1, 2021, when Schmidts common stock had a market price of $33 per
share, Facial Mapping converted the bonds it held. Prepare the journal entries
by both Schmidt and Facial Mapping for the conversion of the bonds (book
value method).

AlternateExercisesandProblems
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Exercise 14-3

Problem 14-1

Reporting bonds at
fair value

Straight-line and
effective interest
compared

LO 14-6

LO 14-2
Text: E 14-30
Text: P 14-3

On January 1, 2016, Unnatural Stone issued $400 million of its 8% bonds for
$368 million. The bonds were priced to yield 10%. Interest is payable
semiannually on June 30 and December 31. Unnatural Stone records interest at
the effective rate and elected the option to report these bonds at their fair value.
On December 31, 2016, the fair value of the bonds was $376 million as
determined by their market value on the NYSE. Unnatural determined that
$2,000,000 of the increase in fair value was due to a decline in general interest
rates.
PROBLEMS

Required:
1. Prepare the journal entry to record interest on June 30, 2016 (the first
interest payment).
2. Prepare the journal entry to record interest on December 31, 2016 (the
second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair value for
presentation in the December 31, 2016, balance sheet.
On January 1, 2016, Lamb Services issued $200,000, 9%, four-year bonds.
Interest is paid semiannually on June 30 and December 31. The bonds were
issued at $193,537 to yield an annual return of 10%.
Required:
1. Prepare an amortization schedule that determines interest at the effective
interest rate.
2. Prepare an amortization schedule by the straight-line method.
3. Prepare the journal entries to record interest expense on June 30, 2018, by
each of the two approaches.
4. Explain why the pattern of interest differs between the two methods.
5. Assuming the market rate is still 10%, what price would a second investor pay
the first investor on June 30, 2018, for $20,000 of the bonds?

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8/e

Problem 14-2

Problem 14-3

Note and
installment note
with unrealistic
interest rate

Early
extinguishment

LO 14-3

Text: P 14-15

LO 14-5

Text: P 14-13

Warren Machinery, Inc. constructed an industrial lathe for

Nelson Equipment that was completed and ready for use on
January 1, 2016. Nelson paid for the conveyor by issuing a $500,000, 4-year
note that specified 5% interest to be paid on December 31 of each year. The
conveyor was custom-built for Nelson so its cash price was unknown. By
comparison with similar transactions it was determined that a reasonable interest
rate was 10%.
Required:
1. Prepare the journal entry for Nelsons purchase of the conveyor on January 1,
2016.
2. Prepare an amortization schedule for the four-year term of the note.
3. Prepare the journal entry for Nelsons third interest payment on December 31,
2018.
4. If Nelsons note had been an installment note to be paid in four equal
payments at the end of each year beginning December 31, 2016, what would
be the amount of each installment?
5. Prepare an amortization schedule for the four-year term of the installment
note.
6. Prepare the journal entry for Nelsons third installment payment on December
31, 2018.

The long-term liability section of Westin Laboratories balance sheet as of

December 31, 2015, included 10% bonds having a face amount of $200 million
and a remaining premium of $30 million. On January 1, 2016, Eastern Post
retired some of the bonds before their scheduled maturity.
Required:
Prepare the journal entry by Westin to record the redemption of the bonds under
each of the independent circumstances below:
1. Westin called half the bonds at the call price of 102 (102% of face amount).
2. Westin repurchased $50 million of the bonds on the open market at their
market price of $52.5 million.

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