Demonstration Problem
Snyder Software Inc. has successfully developed a new spreadsheet program. To produce and market the program, the comp
additional financing. On Decemb3r 31, 2005 Snyder borrowed money as follows.
1. Snyder issued $500,000, 11%, 10-year convertible bonds. The bonds sold at face value and pay semiannual interest on Ja
Each $1,000 bond is convertible into 30 shares of Snyder's $20 par value common stock.
2. Snyder issued $1.0 million, 10%, 10-year bonds at face value. Interest is payable semiannually on January 1 and July 1.
3. Snyder also issued a $500,000, 12%, 15-year mortgage note payable. The terms provide for semiannual installment payme
and December 31.
Instructions
1. For the convertible bonds, prepare journal entries for :
(a) The issuance of the bonds on January 1, 2006.
(b) Interest expense on July 1 and December 31, 2006.
(c) The payment of interest on January 1, 2007.
(d) The conversion of all bonds into common stock on January 1, 2007, when the market value of the common stock was $
2. For the 10-year, 10% bonds:
(a) Journalize the issuance of the bonds on January 1, 2006.
(b) Prepare the journal entries for interest expense in 2006. Assume no accrual of interest on July 1.
(c) Prepare the entry for the redemption of the bonds at 101 on January 1, 2009, after paying the interest due on this date.
3. For the mortgage note payable:
(a) Prepare the entry for the issuance of the note on December 31, 2005.
(b) Prepare a payment schedule for the first four installment payments.
(c) Indicate the current and noncurrent amounts for the mortgage note payable at December 21, 2006.
SOLUTION TO DEMONSTRATION PROBLEM
1. (a) 2006
Jan. 1 Cash 500,000
Bonds Payable 500,000
(To record issue of 11%, 10-year convertible bonds at face value)
(b) 2006
July 1 Bond Interest Expense 27,500
Cash ($500,000 x 0.055) 27,500
(To record payment of semiannual interest)
Dec. 31 Bond Interest Expense 27,500
Bond Interest Payable 27,500
(To record accrual of semiannual bond interest)
(c) 2007
Jan. 1 Bond Interest Payable 27,500
Cash 27,500
(To record payment of accrued interest)
(d) Jan. 1 Bonds Payable 500,000
Common Stock *300,000
Paid-in Capital in Excess of Par Value 200,000
(To record conversion of bonds into common stock)
*($500,000/$1,000=500 bonds; 500x30=15,000 shares;
15,000x$20=$300,000)
2. (a) 2006
Jan.1 Cash 1,000,000
Bonds Payable 1,000,000
(To record issuance of bonds)
(b) 2006
July 1 Bond Interest Expense 50,000
Cash 50,000
(To record payment of semiannual interest)
Dec. 31 Bond Interest Expense 50,000
Bond Interest Payable 50,000
(To record accrual of semiannual interest)
(c) 2009
Jan. 1 Bonds Payable 1,000,000
Loss on Bond Redemption *10,000
Cash 1,010,000
(To record redemption of bonds at 101)
*($1,010,000 - $1,000,000)
3. (a) 2005
Dec. 31 Cash 500,000
Mortgage Notes Payable 500,000
(To record issuance of mortgage note payable)
(b) Semiannual
Interest Cash Interest Reduction
Period Payment Expense of Principal
Issue date
1 $ 36,324 $ 30,000 $ 6,324
2 36,324 29,621 6,703
3 36,324 29,218 7,106
4 36,324 28,792 7,532
(c') Current liability $14,638 ($7,106+$7,532)
Long-term liability $472,335
Questions :
1. What would be the interest expense amount for the 5th year of the note in requirement # 3 ?
2. How would you show the transaction of the payoff of the note in requirement # 3 and what would be the date ?
nd market the program, the company needed $2.0 million of
nd pay semiannual interest on January 1 and July 1.
nually on January 1 and July 1.
for semiannual installment payments of $36,324 on June 30
value of the common stock was $67 per share.
ying the interest due on this date.
ber 21, 2006.
Principal
Balance
$ 500,000
493,676
486,973
479,867
472,335
t would be the date ?
