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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions

On January 1, 2007 the Calvert Company issues 12%, $100,000 face value bonds for $103,545.91, a price to yield 10%. The bonds mature on January 1, 2009. Interest is paid semiannually on June 30 and December 31.Required1. Prepare a bond interest expense and premium amortization schedule using the
Rockwood Company issued $100,000 of 10% bonds on November 1, 2007 at 103. Interest on the bonds is payable on November 1 and May 1 of each year, and the maturity date is November 1, 2017. Rockwood Company retired bonds with a face value of $20,000 on February 1, 2009, at 98 plus accrued interest.
Burr Motor Company, a manufacturer of small- to medium-sized electric motors, needs additional funds to market a revolutionary new motor. Burr has arranged for private placement of a $50,000, five-year, 11% bond issue. Interest on these bonds is paid annually each year on August 31. The issue was
The Hill Corporation issued $1,500,000 of 11% bonds at 98 on January 2, 2005. Interest is paid semiannually on June 30 and December 31. The bonds had a 10-year life from the date of issue, and the company uses the straight-line method of amortization. On March 31, 2008 the company recalls the bonds
On December 1, 2005 the Cone Company issued its 10%, $2 million face value bonds for $2.3 million, plus accrued interest. Interest is payable on November 1 and May 1. On December 31, 2007 the book value of the bonds, inclusive of the unamortized premium, was $2.1 million. On July 1, 2008 Cone
On July 2, 2006 the McGraw Corporation issued $500,000 of convertible bonds. Each $1,000 bond could be converted into 20 shares of the company’s $5 par value stock. On July 3, 2008, when the bonds had an unamortized discount of $7,400, and the market value of the McGraw shares was $52 per share,
On January 1, 2006, when its $30 par value common stock was selling for $80 per share, a corporation issued $10 million of 10% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert it into six shares of the corporation’s $30 par value
On July 1, 2008 the Tuttle Company had bonds payable outstanding with a face value of $200,000 and a book value of $194,000. The interest on these bonds was paid on June 30. When these bonds were issued, each $1,000 bond was convertible into 20 shares of $10 par common stock. To induce conversion,
Conroe Corporation sold $500,000 of 13% bonds at 107. Each $1,000 bond carried 20 warrants, and each warrant allowed the holder to acquire one share of $10 par value common stock for $20 per share. Subsequent to the issuance of the securities, the bonds were quoted at 102 ex rights, and the
On July 1, 2007 Salem Corporation issued $3 million of 12% bonds payable in 10 years. The bonds pay interest semiannually. The bonds include detachable warrants giving the bondholder the right to purchase for $30, one share of $1 par value common stock at any time during the next 10 years. The
On January 1, 2007 the Johnson Corporation issued a two-year note due December 31, 2008, with a face value of $10,000, receiving $7,694.68 in exchange.RequiredPrepare the journal entries to account for the note:1. On the date the note is issued2. At the end of 20073. At the end of 2008
The Spath Company borrows $75,000 by issuing a four-year, noninterest-bearing note to a customer on January 1, 2007. In addition, Spath Company agrees to sell inventory to the customer at reduced prices over a five-year period. Spath’s incremental borrowing rate is 12%. The customer agrees to
The Webb Corporation purchased an asset from the Shaw Corporation on January 1, 2007. Shaw accepted a three-year, non-interest-bearing note of $18,000 due December 31, 2009 in exchange for the asset. Neither the fair value of the asset nor that of the note is available. Webb’s incremental
On January 1, 2007 the Sanders Corporation purchased equipment having a fair value of $68,301.30 by issuing a non-interest-bearing, $100,000, four-year note due December 31, 2010.RequiredPrepare the journal entries to record(1) The purchase of the equipment,(2) The annual interest charges over the
On January 1, 2007 the Billips Corporation purchased equipment having a fair value of $72,054.94 by issuing a $90,000 note, payable in three $30,000 annual installments beginning December 31, 2007.RequiredPrepare(1) The journal entry to record the purchase of the equipment,(2) A schedule to compute
On January 1, 2007 Crouser Company sold land to Chad Company, accepting a two-year, $150,000 non-interest-bearing note due January 1, 2009. The fair value of the land was $123,966.90 on the date of sale. The company purchased the land for $120,000 on January 1, 2001.RequiredPrepare all the journal
On January 1, 2007 Worthylake Company sold used machinery to Brown Company, accepting a $25,000 non-interest-bearing note maturing on January 1, 2009. Worthylake Company carried the machinery on its books at a cost of $22,000 and a current book value of $15,000. Neither the fair value of the
On January 1, 2007 Tabor Company sold land with a book value of $50,000 to Wilson Company, accepting a $60,000 note, payable in three $20,000 annual installments beginning December 31, 2007. The note carried no stated interest rate and the fair values of the land and the note were not determinable.
On January 1, 2007 Boiler Company received two notes for merchandise sold:Note 1: A $10,000, 10%, 60-day note from Wildcat, Inc.Note 2: A $20,000, 8%, three-year interest-bearing note from Gopher, Inc.On January 1, 2007 the fair rate of interest was 10%. Needing cash to meet the upcoming payroll,
On January 1, 2007 the Pitt Company sold a patent to Chatham, Inc., which had a carrying value on Pitt's books of $10,000. Chatham gave Pitt a $60,000 non-interest-bearing note payable in five equal annual installments of $12,000, with the first payment due and paid on January 1, 2008. There was no
The Perry National Bank has a note receivable of $200,000 from the Mogren Company that it is carrying at face value and is due on December 31, 2011. Interest on the note is payable at 9% each December 31. The Mogren Company paid the interest due on December 31, 2007, but informed the bank that it
The Oaks National Bank has a note receivable of $500,000 from the Haldane Company that it is carrying at face value and is due on December 31, 2013. Interest on the note is payable at 6% each December 31. The Haldane Company paid the interest due on December 31, 2007, but informed the bank that it
On January 1, 2007 Northfield Corporation becomes delinquent on a $100,000, 14% note to the First National Bank, on which $16,651 of interest has accrued. On January 2, 2007 the bank agrees to restructure the note. It forgives the accrued interest, extends the repayment date to December 31, 2009,
On January 1, 2007 the Boonville Corporation is delinquent on a $300,000 note to the Great National Bank on which $66,000 of interest has accrued. On January 2, 2007 Boonville enters into a debt restructuring agreement with the bank.RequiredPrepare the journal entries for Boonville to record the
On December 31, 2007 Central Bank agrees to a restructuring of a 12% note with a $200,000 face value and $60,000 of accrued interest owed to the bank by Carter Company. The bank agrees to forgive the accrued interest, extend the maturity date to December 31, 2010, and reduce the annual interest
Refer to the debt restructuring information in E14-31.RequiredPrepare the journal entries for Great National Bank to record the restructuring agreement assuming:1. The bank accepts the 10,000 shares of Boonville’s stock.2. The bank accepts the land.
On July 1, 2006 the Nicholsen Corporation issued $300,000 of bonds, with a 13% face rate of interest, for $318,000. The bonds pay interest semiannually on each January 1 and July 1 and are to be repaid in three equal semiannual installments beginning July 1, 2008. Assume the company’s fiscal year
The Lewis Company sells $200,000 of 13% bonds dated January 1, 2006, on that date, for $204,650.74 to yield 12%. The bonds pay interest annually on December 31, and bonds of $40,000 mature on each December 31 for the next 5 years. The company uses the effective interest method of
On January 1, 2006 Mykoo Corporation issued $1 million in five-year, 10% serial bonds to be repaid in the amount of $200,000 on January 1, 2007, 2008, 2009, 2010, and 2011. Interest is payable at the end of each year. The bonds were sold to yield a rate of 12%. Information on present value and
On January 1, 2006 the Baker Corporation issued $100,000 of five-year bonds due December 31, 2010 for $103,604.79 less bond issue costs of $3,000. The bonds carry a face rate of interest of 13% payable annually on December 31 and were issued to yield 12%. The company uses the effective interest
On June 30, 2007 the Watson Corporation sold $800,000 of 11% face value bonds for $761,150.96. On December 31, 2007 the Watson Corporation sold $700,000 of this same bond issue for $734,645.28. The bonds were dated January 1, 2007, pay interest semiannually on each December 31 and June 30, and are
Maturity The Dorsett Corporation issued $600,000 of 13% bonds on January 1, 2006 for $614,752.24. The bonds are due December 31, 2008, were issued to yield 12%, and pay interest semiannually on June 30 and December 31. The company uses the effective interest method.Required1. Prepare a bond
The Batson Corporation issued $800,000 of 12% face value bonds for $851,705.70. The bonds were dated and issued on April 1, 2007, are due March 31, 2011, and pay interest semiannually on September 30 and March 31. The company sold the bonds to yield 10%.Required1. Prepare a bond interest expense
Donaldson Incorporated sold $500,000 of 12% bonds on January 1, 2006 for $470,143.47, a price that yields a 14% interest rate. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2009. The company uses the effective interest method.Required1. Prepare an interest
The Wilkerson Corporation issued $1 million of 13.5% bonds for $985,071.68. The bonds are dated and issued October 1, 2007, are due September 30, 2011, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%.Required1. Prepare a bond interest expense and
The Baxter Corporation issued $400,000 of 11% bonds for $385,279.91 on January 1, 2006. The bonds pay interest semiannually on June 30 and December 31, were issued to yield 12%, and are due on December 31, 2010. Interest is amortized using the effective interest method, and the bonds are callable
The Shank Corporation issued $1,500,000 of 10% convertible bonds for $1,620,000 on March 1, 2006. The bonds are dated March 1, 2006, pay interest semiannually on August 31 and February 28, and the premium is amortized using the straight-line method. The bonds are due on February 28, 2016, and each
On January 1, 2007 the London Corporation issued $500,000 of 11.5% bonds due January 1, 2017 at 102. The bonds pay interest semiannually on June 30 and December 31. Each $1,000 bond carried 20 warrants, and the exchange of two warrants allowed the holder to acquire one share of $10 par common stock
The Houston Corporation acquires machinery from the South Company in exchange for a $20,000 non-interest-bearing, five-year note on June 30, 2006. The note is due on June 30, 2011. The machinery has a fair value of $11,348.54, is subject to straight-line depreciation, and has an estimated life of
Hamlet Corporation purchases computer equipment at a price of $100,000 on January 1, 2007, paying $40,000 down and agreeing to pay the balance in three $20,000 annual installments beginning December 31, 2007. It is not possible to value either the equipment or the $60,000 note directly; however,
On January 1, 2007 the Somerville Corporation sold a used truck to the Cornelius Company and accepted a $28,000 non-interest-bearing note due January 1, 2010. Somerville carried the truck on its books at a cost of $30,000 and a current book value of $23,000. Neither the fair value of the truck nor
On January 1, 2007 Lisa Company sold machinery with a book value of $118,000 to Mark Company. Mark Company signed a $180,000 non-interest-bearing note, payable in three $60,000 annual installments on December 31, 2007, 2008, and 2009. The fair value of the machinery was $149,211.12 on the date of
On January 1, 2007 Seaver Company sold land with a book value of $23,000 to Bench Company. Bench Company paid $15,000 down and signed a $15,000 non-interest-bearing note, payable in two $7,500 annual installments on December 31, 2007 and 2008. Neither the fair value of the land nor of the note is
Linden, Inc., had the following long-term receivable account balances at December 31, 2006:Note receivable from sale of division ... $1,500,000Note receivable from officer ........ 400,000Transactions during 2007 and other information relating to Linden’s long-term receivables were as follows:1.
An examination of the accounting records of the Durham Corporation on January 1, 2008 (after reversing entries had been made for all accrued interest at the end of 2007) disclosed the following information regarding the company’s long-term debt:12.5% bonds, dated January 1, 2004, paying interest
The Oakwood Corporation is delinquent on a $2,400,000, 10% note to the Second National Bank that was due January 1, 2007. At that time Oakwood owed the principal amount plus $34,031.82 of accrued interest. Oakwood enters into a debt restructuring agreement with the bank on January 2,
Refer to the debt restructuring information listed in P14-17.RequiredFor each of the independent alternatives listed in Requirements 1 through 4 of P14-17, prepare the journal entries for Second National Bank to record the debt restructuring agreement and all subsequent interest receipts.
The 10th National Bank has a $200,000, 12% note receivable from the Priday Company that is due on December 31, 2010. On December 31, 2007 the company misses the interest payment due on that date. The bank expects that the company will also miss the next payment, but will pay the principal on the
On July 1, 2007 the Hubbard Corporation issued $600,000 of bonds with an 8% face rate of interest. The bonds were issued for $589,381.93, pay interest semiannually on June 30 and December 31, carry an effective yield rate of 9%, and are payable in three annual installments of $200,000 each,
The Case Corporation issued $600,000 of 13% bonds on January 1, 2006 for $636,000. The bonds are payable in three annual $200,000 installments beginning December 31, 2007, pay interest semiannually on June 30 and December 31, and are callable at 107. On January 1, 2008 the bonds due December 31,
The appropriate method of amortizing a premium or discount on issuance of bonds is the effective interest method.Required1. What is the effective interest method of amortization and how is it different from and similar to the straight line method of amortization?2. Explain how a company computes
One way for a corporation to accomplish long-term financing is through the issuance of long-term debt instruments in the form of bonds.Required1. Explain how to account for the proceeds from bonds issued with detachable stock purchase warrants.2. Contrast a serial bond with a term (straight)
On February 1, 2004 Aubrey Company sold its five-year, $1,000 par value, 9% bonds, which were convertible at the option of the investor into Aubrey Company common stock at a ratio of 10 shares of common stock for each bond. Aubrey Company sold the convertible bonds at a discount. Interest is
A company’s gains or losses from the early extinguishment of debt theoretically can be accounted for in three ways:a. Amortized over remaining life of old debtb. Amortized over the life of the new debt issuec. Recognized in the period of extinguishmentRequired1. Discuss the supporting arguments
On November 1, 2007 Janine Company sold directly to underwriters at a lump-sum price, $1,000 face value, 9% serial bonds dated November 1, 2007 at an effective annual interest rate (yield) of 11%. A total of 25% of these serial bonds are due on November 1, 2009, a total of 35% on November 1, 2010,
Zakin Co. recently issued $1,000,000 face value, 10%, 30-year subordinated debentures at 97. The debentures are redeemable at 103 upon demand by the issuer at any date upon 30 days notice10 years after the issue. The debentures are convertible into $10 par value common stock of the Company at the
Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequently used corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in
Business transactions often involve the exchange of property, goods, or services for notes or similar instruments that may stipulate no interest rate or an interest rate that varies from prevailing rates.Required1. When a company exchanges a note for property, goods, or services, what value does it
On March 2, 2007 Wesley Company sold its five-year, $1,000 face value, 8% bonds dated March 2, 2007 at an effective annual interest rate (yield) of 10%. Interest is payable semiannually and the first interest payment date is September 2, 2007. Wesley uses the interest method of amortization and
On January 1, 2006 Brewster Company issued 2,000 of its five-year, $1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2007 Brewster extinguished the 2,000 bonds early through
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. What was the difference between the interest expense and interest paid in 2004?2. How much long-term debt will mature in 2005?3. Assuming no long-term debt was issued or retired
You are an accountant for the Virden Company, which has two items of long-term convertible debt on its balance sheet. The president of the company calls you into his office and says, “We are too leveraged. So, you remember that convertible debt we issued at the beginning of the year? Let’s
Situation You are auditing the York Company when you come across a note receivable signed by the president of a company that is a major supplier. The note has a face value of $100,000, is payable to the York Company, is dated January 1, 2007, and is payable January 1, 2008. The interest rate on
Situation The Wales Company has a $90,000, non-interest-bearing four-year note receivable from the Spenser Company that was received on July 1, 2007 when Wales sold a used machine. The machine was custom made five years ago, cost the Wales Company $100,000, and was being depreciated over a 10-year
What information is contained in a corporation’s articles of incorporation?
What is the difference between (a) A public and private corporation, (b) An open and closed corporation, and (c) A domestic and foreign corporation (as viewed by a particular state)?
What is (a) A stock certificate, (b) A stockholders’ ledger, (c) A stock transfer journal, and (d) A transfer agent?
List the various rights of a stockholder. Which do you consider to be the most important?
What is the meaning of the following terms: (a) Authorized capital stock, (b) Issued capital stock, (c) Outstanding capital stock, and (d) Treasury stock? What is the difference between the number of issued and outstanding capital shares?
What is a corporation’s legal capital and why is it important?
How is a corporation’s legal capital determined, assuming its capital stock has a par value, a stated value, or no par value?
What are the three components and the basic framework of stockholders’ equity?
How does preferred stock differ from common stock?
What amount of the proceeds from the issuance of no-par, no-stated-value stock is recorded in the Capital Stock account?
What is a stock subscription? How does a corporation report the accounts Subscriptions Receivable and Preferred Stock Subscribed on its balance sheet? Why?
What alternatives are possible if a subscriber defaults on a stock subscription? How would you determine which alternative to use?
How would you record the proceeds received from the combined issuance by a corporation of shares of common stock with shares of preferred stock?
If a corporation issues capital stock for an asset other than cash, what amount would you use to record the transaction?
When do (a) watered stock or (b) secret reserves result from the recording of a nonmonetary issuance of stock? What impact does each have on a corporation’s balance sheet?
What is a stock split and a disproportionate stock split? How do they affect each element of a corporation’s stockholders’ equity?
(a) What are the criteria for a noncompensatory share option plan? (b) How does a compensatory share option plan differ from a noncompensatory plan? (c) What is the intent of a noncompensatory plan? Of a compensatory plan?
Under the fair value method, how does a corporation determine the total compensation cost for a compensatory share option plan? How does it recognize this amount as compensation expense?
What are share appreciation rights? Why are they advantageous to an employee?
Define the following terms regarding preferred stock: (a) Dividend preference, (b) Cumulative, (c) Participating, (d) Convertible, (e) Warrants, (f) Callable, and (g) Redeemable.
Why is a preferred stock similar to a long-term bond? Why is it similar to common stock?
What are the two segments of a corporation’s contributed capital and what might be included in each segment?
(a) What is treasury stock? (b) Why might a corporation acquire treasury stock?
If a corporation uses the cost method to account for treasury stock, the treasury stock “event” is treated as though it consists of two elements; if it uses the par value method, the reacquisition and reissuance transactions are viewed as separate events. Explain the accounting differences
How does a corporation report the Treasury Stock account under the cost method of accounting for treasury stock? Under the par value method?
What accounting procedures are involved under the cost method when a corporation retires treasury stock?
(Multiple Choice)1. On July 14, JX Corporation exchanged 1,000 shares of its $8 par value common stock for a plot of land. JX’s common stock is listed on the NYSE and traded at an average price of $21 per share on July 14. The land was appraised by independent real estate appraisers on July 14
Cutler Corporation is authorized to issue 10,000 shares of common stock. It sells 6,000 shares at $19 per share.RequiredRecord the sale of the common stock, given the following independent assumptions:1. The stock has a par value of $10 per share.2. The stock is no-par stock, but the board of
Estes Company issues 300 shares of $50 par preferred stock and 1,000 shares of $10 par common stock in a “package” sale. Total proceeds received amount to $39,000.RequiredRecord the transaction for each independent assumption shown:1. The common stock has a current market value of $19 per
Kelly Company issues 12% bonds with a face value of $10,000 and 600 shares of $10 par common stock in a combined sale, receiving total proceeds of $23,000.RequiredRecord the transaction for each independent assumption shown:1. The common stock has a current market value of $21 per share; the
The Putt Company issues 500 shares of $100 preferred stock for land. This land was carried on the seller’s books for $40,000.Required1. Prepare the journal entry to record the acquisition of the land for each of the following independent situations:a. The preferred stock is currently selling for
On February 3 the Teel Corporation enters into a subscription contract with several subscribers for 5,000 shares of $10 par common stock at a price of $16 per share. The contract requires a down payment of 25%, with the remaining balance to be paid on May 3. The stock will be issued to each
Holton Company currently has 9,000 shares of $12 par common stock outstanding that had been issued at an average price of $60 per share. It declares a three-for-one stock split.RequiredPrepare whatever entry is necessary to record the stock split, assuming the following independent alternatives:1.
McEnroe Company has 20 executives to whom it grants compensatory share options on January 1, 2007. At that time it grants each executive the right to purchase 100 shares of its $5 par common stock at $40 per share after a three-year service period. The value of each option is estimated to be $10.25
On January 1, 2007 Sampress Company adopts a compensatory share option plan for its 50 executives. The plan allows each executive to purchase 200 shares of its $2 par common stock for $30 per share after completing a three-year service period. Sampress estimates the value of each option to be
On January 1, 2007 Seles Company adopts a performance-based share option plan for its 80 key executives. Each executive is granted a maximum of 70 share options, but the number of options that vest depends on the percentage increase in Seles Company’s sales over a three-year service period. If by

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