TUTORIAL - INTERMEDIATE FINANCIAL ACCOUNTING 2

Long-Term Liabilities
Rio Saumun Qodri

PROBLEM 1 Bonds at Premium

Venzuela Co. is building a new hockey arena at a cost of $2,500,000. It received a
downpayment of $500,000 from local businesses to support the project, and now need to
borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of
10.5%, 10-year bonds. These bonds were issued on January 1, 2009, and pay interest
annually on each January 1. The bond yields 10%.
PV Single-Sum (10,10%): 0.38554
PV Annuity (10,10%): 6.14457
Instructions:
a) Prepare the journal entry to record the issuance of the bonds on January 1, 2009.
b) Prepare a bond amortization schedule up to and including January 1, 2013.
c) Prepare journal entry to record interest expense on Jan 1, 2012.
d) Prepare the journal entry to record the transaction at maturity (on January 1, 2019).

PROBLEM 2 Zero Interest Bearing Notes

On January 1, 2011, McLean Company makes the following acquisition: Purchase equipment
by issuing a 6%, 8-year promissory note having a maturity value of $400,000 (interest
payable annually). The company has to pay 11% interest for funds from bank.
PV Single-Sum (8,11%): 0.43393 PV Single-Sum (8,6%): 0.39334
PV Annuity (8,11%): 5.14612 PV Annuity (8,6%): 4.14457
Instructions:
a) Record the journal entries that should be recorded by McLean Company for the
purchase on January 1, 2011.
b) Record the interest at the end of the first year.
PROBLEM 3 Bonds at Discount (HOMEWORK)

On March 1, 2012, Langley Co. issued 8% 3-year bonds with a face value of $700,000 to yield
10%. The bonds pay interest semiannually on March 1 and on September 1 starting on
September 1, 2012.

Instructions:

a) Prepare the journal entry to record the transaction of Langley Co. on the following
dates:
i. March 1, 2012.
ii. September 1, 2012.
iii. December 31, 2012.
iv. March 1, 2013

Support the journal entries with amortization schedule using effective-interest method.

b) Assume that on June 1, 2013 Langley Co. retires half of the bonds at a cost of $375,000
including accrued interest. Prepare the journal entry to record the retirement.