Page 625 - Accounting Principles (A Business Perspective)

15. Long-term financing: Bonds

Alternate problem C On 2009 July 1, Tick-Tock Clock Company issued USD 100,000 face value of 8 per cent,
10-year bonds. These bonds call for semiannual interest payments and mature on 2019 July 1. The company
received cash of USD 87,538, a price that yields 10 per cent.

Assume that the company's fiscal year ends on March 31. Prepare journal entries to record the bond interest
expense on 2010 January 1, and the adjustment needed on 2010 March 31, using the interest method. Calculate all
amounts to the nearest dollar.
Alternate problem D Creative Web Page issued USD 600,000 face value of 15 per cent, 20-year bonds on
2010 October 1. The bonds are dated 2010 October 1, call for semiannual interest payments on April 1 and October
1, and are issued to yield 16 per cent (8 per cent per period).
a. Compute the amount received for the bonds.

b. Prepare an amortization schedule similar to that in Exhibit 120. Enter data in the schedule for only the first
two interest periods. Use the interest method.
c. Prepare journal entries to record issuance of the bonds, the first six months' interest expense on the bonds,
and the adjustment needed on 2011 May 31, assuming Creative Web Page's fiscal year ends on that date.
Alternate problem E Goodhew Software Systems, Inc., issued USD 100,000 face value of 10 per cent, 20-year
bonds on 2009 July 1. The bonds are dated 2009 July 1, call for semiannual interest payments on July 1 and
January 1, and are issued to yield 12 per cent (6 per cent per period).
a. Compute the amount received for the bonds.
b. Prepare an amortization schedule similar to that in Exhibit 120. Enter data in the schedule for only the first

two interest periods. Use the interest method and calculate all amounts to the nearest dollar.
c. Prepare entries to record the issuance of the bonds, the first six months' interest on the bonds, and the
adjustment needed on 2010 June 30, assuming Goodhew's fiscal year ends on that date.
Alternate problem F Western Solar Energy Company issued USD 400,000 of 12 per cent bonds on 2009 July
1, at face value. The bonds are dated 2009 July 1, call for semiannual payments on July 1 and January 1, and mature
at the rate of USD 40,000 per year on July 1, beginning in 2010. The company's accounting period ends on
September 30.

a. Prepare journal entries to record the interest expense and payment for the six months ending 2010 July 1; the
maturing of the bonds on 2010 July 1; and the adjusting entries needed on 2010 September 30.
b. Show how the bonds would be presented in the company's balance sheet for 2010 September 30.
Beyond the numbers—Critical thinking
Business decision case A A company is trying to decide whether to invest USD 2 million on plant expansion
and USD 1 million to finance a related increase in inventories and accounts receivable. The USD 3 million

expansion is expected to increase business volume substantially. Profit forecasts indicate that income from
operations will rise from USD 1.6 million to USD 2.4 million. The income tax rate will be about 40 per cent. Net
income last year was USD 918,000. Interest expense on debt now outstanding is USD 70,000 per year. There are
200,000 shares of common stock currently outstanding. The USD 3 million needed can be obtained in two
alternative ways:
• Finance entirely by issuing additional shares of common stock at an expected issue price of USD 75 per
share.

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