E14-3

(Entries for Bond Transactions) Presented below are two independent situations.
1. On January 1, 2015, Divac Company issued €300,000 of 9%, 10-year bonds at par. Interest is payable
quarterly on April 1, July 1, October 1, and January 1.
2. On June 1, 2015, Verbitsky Company issued €200,000 of 12%, 10-year bonds dated January 1 at par plus
accrued interest. Interest is payable semiannually on July 1 and January 1.
Instructions
For each of these two independent situations, prepare journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest on July 1.
(c) The accrual of interest on December 31.

E14-4(Entries for Bond Transactions)

Foreman Company issued €800,000 of 10%, 20-year bonds on January 1, 2015, at 119.792 to yield 8%. Interest
is payable semiannually on July 1 and January 1.
Instructions
Prepare the journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and the related amortization on July 1, 2015.
(c) The accrual of interest and the related amortization on December 31, 2015.

E14-5
(Entries for Bond Transactions)Assume the same information as in E14-4, except that the bonds were issued at
84.95 to yield 12%.
Instructions
Prepare the journal entries to record the following. (Round to the nearest euro.)
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2015.
(c) The accrual of interest and the related amortization on December 31, 2015.

E14-11
(Entries for Zero-Interest-Bearing Notes)
On January 1, 2015, McLean Company makes the two following acquisitions.
1. Purchases land having a fair value of €300,000 by issuing a 5-year, zero-interest-bearing promissory note in
the face amount of €505,518.
2. Purchases 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 its bank.
Instructions
(a) Record the two journal entries that should be recorded by McLean Company for the two purchases on
January 1, 2015.
(b) Record the interest at the end of the first year on both notes.

E14-12
(Imputation of Interest) Presented below are two independent situations.
Instructions
(a) On January 1, 2015, Spartan Inc. purchased land that had an assessed value of $390,000 at the time of
purchase. A $600,000, zero-interest bearing note due January 1, 2018, was given in exchange. There was no
established exchange price for the land, nor a ready market price for the note. The interest rate charged on a
note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2015, and the
interest expense to be reported in 2015 related to this transaction.
(b) On January 1, 2015, Geimer Furniture Co.
customer, through a zero-interest-bearing note
Geimer Furniture agreed to sell furniture to this
normally charged on this type of loan. Prepare
amount of interest expense to report for 2015.
borrowed $4,000,000 (face value) from Aurora Co., a major
due in 4 years. Because the note was zero-interest-bearing,
customer at lower than market price. A 10% rate of interest is
the journal entry to record this transaction and determine the

E14-15
(Entries for Retirement and Issuance of Bonds)
On June 30, 2007, Mendenhal Company issued 8% bonds with a par value of £600,000 due in 20 years. They
were issued at 82.8414 to yield 10% and were callable at 104 at any date after June 30, 2015. Because of lower
interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on
June 30, 2016, and to issue new bonds. New 6% bonds were sold in the amount of £800,000 at 112.5513 to
yield 5%; they mature in 20 years. Interest payment dates are December 31 and June 30 for both old and new
bonds.
Instructions
(a) Prepare journal entries to record the retirement of the old issue and the sale of the new issue on June 30,
2016. Unamortized discount is £78,979.
(b) Prepare the entry required on December 31, 2016, to record the payment of the first 6 months’ interest and
the amortization of premium on the bonds.

E14-21 (Fair Value Option)Fallen Company commonly issues long-term notes payable to its various lenders.
Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an
annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank
and has the following data related to the carrying and fair value for these notes. (Assume that changes in fair
value are due to general market interest rate changes).
Carrying Value Fair Value
December 31, 2015 €54,000 €54,000
December 31, 2016 44,000 42,500
December 31, 2017 36,000 38,000

Instructions
(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2015, 2016, and 2017, to record the fair
value option for these notes.
(b) At what amount will the note be reported on Fallen’s 2016 statement of financial position?
(c) What is the effect of recording the fair value option on these notes on Fallen’s 2017 income?
(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the
notes indicate that Fallen’s creditworthiness has improved or declined in 2017? Explain.
(e) Assuming the conditions that exist in (d), what is the effect of recording the fair value option on these notes
in Fallen’s income statement in 2015, 2016, and 2017?
EXERCISE 14-3 (15–20 minutes)
1.Divac Company:
(a) 1/1/10 Cash...................................................................300,000
Bonds Payable.....................................................300,000
(b) 7/1/10 Interest Expense(€300,000 X 9% X 3/12) ............6,750
Cash...................................................................... ..6,750
(c) 12/31/10 Interest Expense.....................................................6,750
Interest Payable.......................................................6,750
2.Verbitsky Company:
(a) 6/1/10 Cash....................................................................210,000
Bonds Payable......................................................200,000
Interest Expense(€200,000 X 12% X 5/12)...........10,000
(b) 7/1/10 Interest Expense....................................................12,000
Cash (€200,000 X 12% X 6/12) ............................12,000
(c) 12/31/10 Interest Expense...................................................12,000
Interest Payable......................................................12,000
Note to instructor: Some students may credit Interest Payable on 6/1/10. If they do so, the entry on 7/1/10 will have a
debit to Interest Payable for €10,000 and a debit to Interest Expense for €2,000.

EXERCISE 14-4 (15–20 minutes)

(a) 1/1/11 Cash ($800,000 X 1.19792)...................................958,336
Bonds Payable....................................................... 958,336
(b) 7/1/11 Interest Expense($958,336 X 8% X 6/12)................38,333
Bonds Payable............................................................1,667
Cash ($800,000 X 10% X 6/12)...............................40,000
(c) 12/31/11 Interest Expense($958,336–$1,667)X8%X6/12......38,267
Bonds Payable............................................................1,733
Interest Payable........................................................40,000

EXERCISE 14-5 (15–20 minutes)

(a) 1/1/11 Cash ($800,000 X .8495)......................................679,600
Bonds Payable.......................................................679,600
(b) 7/1/11 Interest Expense($679,600 X 12% X 1/2................40,776
Bonds Payable..............................................................776
Cash ($800,000 X 10% X 6/12) .............................40,000
(c) 12/31/11 Interest Expense[($679,600+$776)X12%X1/2]…..40,823
Bonds Payable..............................................................823
Interest Payable.......................................................40,000

EXERCISE 14-11 (15–20 minutes)

(a) 1. January 1, 2011
Land.................................................................300,000
Notes Payable.........................................................300,000
(The $300,000 capitalized land cost represents the present value of the note discounted for five years at 11%.)
2. Equipment........................................................297,079*
Notes Payable..........................................................297,079
*Computation of the present value of the note:
Present value of $400,000due in 8 years at 11%—$400,000 X .43393..................................................$173,572
Present value of $24,000payable annually for8 years at 11% annually—$24,000 X 5.14612 ............... 123,507 +
Present value of the note $297,079
(b) 1. Interest Expense........................................………………………..33,000
Notes Payable($300,000 X .11)..........................................................33,000
2. Interest Expense($297,079 X .11)...................................................32,679
Notes Payable........................................................................................8,679
Cash ($400,000 X .06).........................................................................24,000
EXERCISE 14-12 (15–20 minutes)
(a) Face value of the zero-interest-bearing note..................................................... $600,000
Discounting factor (12% for 3 periods)............................................................ 0.71178 x
Amount to be recorded for the land at January 1, 2011 ................................... $427,068

Carrying value of the note at January 1, 2011.................................................. $427,068

Applicable interest rate (12%).......................................................................... 0.12 x
Interest expense to be reported in 2011............................................................ $ 51,248
(b) January 1, 2011
Cash...............................................................................4,000,000
Notes Payable........................................................................ 2,732,040
Unearned Revenue................................................................. 1,267,960*
*$4,000,000 – ($4,000,000 X .68301) = $1,267,960
Carrying value of the noteat January 1, 2011....................................................................... $2,732,040
Applicable interest rate (10%) ............................................................................................. 0.10 x
Interest expense to bereported for 2011 .............................................................................. $ 273,204

EXERCISE 14-15 (12–16 minutes)

(a) June 30, 2011
Bonds Payable ($600,000 – $78,979)...........................521,021
Loss on Extinguishment of Bonds.................................102,979
Cash..................................................................................624,000
Reacquisition price ($600,000 X 104%)....................................................................... $ 624,000
Net carrying amount of bonds redeemed:($600,000 – $78,979)................................... (521,021) -
Loss on extinguishment................................................................................................. $ 102,979
Cash ($800,000 X 112.5513%).....................................900,410
Bonds Payable..................................................................900,410
(b) December 31, 2011
Interest Expense..............................................................22,510*
Bonds Payable...................................................................1,490
Cash....................................................................................24,000**
*($900,410 X 5% X 6/12)
**(.03 X $800,000 = $24,000)

EXERCISE 14-21 (10–15 minutes)

(a) December 31, 2010 No entry since the carrying value is equal to the notes’ fair value.
December 31, 2011 Note Payable..............................................................................1,500
Unrealized Holding Gain or Loss—Income.................................1,500
December 31, 2012 Unrealized Holding Gain or Loss—Income..............................3,500
Note Payable [(€38,000 – €36,000) + €1,500].............................3,500
(b) The note will be reported at €42,500 on Fallen’s 2011 statement of financial position.
(c) Fallen’s 2012 income is €3,500 lower since the change in fair value is reported as part of net income.
(d) Fallen’s creditworthiness has declined since the fair value of its debt declined. Since the general market interest rates
have been stable, the fair value decline must have been caused by a decline in Fallen’s creditworthiness.