Question

Evaluate statements about bonds. (LO 1) Prepare journal entry for bond issuance and show balance sheet presentation (LO 2) Prepare entry for bond redemption (LO2) Prepare entries for mortgage note and installment payment ont Hote. (LO 3) Prepare entry for lease, and compute debt to assets ratio. (LO 4) DO IT! 15-1 State whether each of the following statements is true or false. 1. Mortgage bonds and sinking fund bonds are both examples of debenture bonds. 2. Convertible bonds are also known as callable bonds. 3. The market rate is the rate investors demand for loaning funds. 4. Annual interest on bonds is equal to the face value times the stated rate. 5. The present value of a bond is the value at which it should sell in the market. DO IT! 15-20 Eubank Corporation issues $500,000 of bonds for $520,000. (a) Prepare the journal entry to record the issuance of the bonds, and (b) show how the bonds would be reported on the balance sheet at the date of issuance. DO IT! 15-2b Prater Corporation issued $400,000 of 10-year bonds at a discount. Prior to maturity, when the carrying value of the bonds was $390.000, the company redeemed the bonds at 99. Prepare the entry to record the redemption of the bonds. DO ITI 153 Detwiler Orchard issues a $700,000, 6%, 15-year mortgage note to obtain needed financing for a new lab. The terms call for annual payments of $72,074 each. Pre pare the entries to record the mortgage loan and the first installment payment. DO ITI 154 Huebner Corporation leases new equipment on December 31, 2017. The lease transfers ownership of the equipment to Huebner at the end of the lease. The present value of the lease payments is $192,000. After recording this lease, Huebner has assets of $1,800,000, liabilities of $1,100,000, and stockholders' equity of $700,000. (a) Prepare the entry to record the lease, and (b) compute and discuss the debt to assets ratio at yearend.

Answer 1

15-1

1. True, mortgage bond and sinking fund are debenture bonds.

2. False, convertible bonds allow holder the option to convert bond in equity. Callable bonds gives right to issuer to buy it back. There is no big difference between two. But as convertible bond gives right to holder and callable bond gives obligation to seller, convertible and callable are different.

3. True, rate at which investors demand loaning funds is market rate.

4. True, interest is calculated on face value of the bond.

5. True, Present value is value at which is tradeable in market.

15-2a

JOURNAL ENTRY

Date	Particulars	Debit($)	Credit($)
	Cash a/c	5,20,000
	To bonds payable a/c		5,00,000
	To premium on bonds payable a/c		20,000
	(being bonds issued at premium)

An excerpt from balance sheet

Particulars	($)
Liabilities
Non current liabilities
Bonds Payable	5,00,000
Premium on bonds payable	20,000
	5,20,000
Assets
Current assets
Cash	5,20,000
	5,20,000

15-2b

Date	Particulars	Debit($)	Credit($)
	Bonds payable a/c	3,90,000
	To cash a/c		3,86,100
	To gain on bonds payable a/c		3,900
	(being bonds redeemed at discount)

As carrying value of bond is $390,000, it means $10,000 bonds were redeemed earlier.

Bonds are redeemed at discount of $1. assuming face value $100 for each bond.

15-3

Date	Particulars	Debit($)	Credit($)
	Bank a/c	7,00,000
	To 6% mortgage note a/c		7,00,000
	(being 6%, 15-year mortgage note issued )
	Interest on 6% mortgage note a/c	42000
	To 6% mortgage note a/c	30074
	To bank a/c		72074
	(being first installment paid)