FA2 TUT 3

E14.7 (Determine Proper Amounts in Account Balances) Presented below are three independent
situations
Instructions
a. McEntire Co. sold $2,500,000 of 11%, 10-year bonds at 106.231 to yield 10% on January 1,
2019. The bonds were dated January 1, 2019, and pay interest on July 1 and January 1.
Determine the amount of interest expense to be reported on July 1, 2019, and December 31,
2019.
b. Cheriel Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2019, for $562,500. This price
provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and
June 30. Determine the amount of interest expense to record if financial statements are issued on
October 31, 2019.
c. On October 1, 2019, Chinook Company sold 12% bonds having a maturity value of $800,000
for $853,382 plus accrued interest, which provides the bondholders with a 10% yield. The bonds
are dated January 1, 2019, and mature January 1, 2024, with interest payable December 31 of
each year. Prepare the journal entries at the date of the bond issuance and for the first interest
payment.
E14.8 (Entries and Questions for Bond Transactions) On June 30, 2018, Macias SA issued
R$5,000,000 face value of 13%, 20-year bonds at R$5,376,150 to yield 12%. The bonds pay
semiannual interest on June 30 and December 31.
Instructions
a. Prepare the journal entries to record the following transactions.
1. The issuance of the bonds on June 30, 2018.
2. The payment of interest and the amortization of the premium on December 31, 2018.
3. The payment of interest and the amortization of the premium on June 30, 2019.
4. The payment of interest and the amortization of the premium on December 31, 2019.
b. Show the proper statement of financial position presentation for the liability for
bonds payable on the December 31, 2019, statement of financial position.
c. Provide the answers to the following questions.
1. What amount of interest expense is reported for 2019?
2. Determine the total cost of borrowing over the life of the bond.
E14.11 (Entries for Zero-Interest-Bearing Notes) On January 1, 2019, McLean AG makes the
two following acquisitions.
1. Purchases land having a fair value of €300,000 by issuing a 5-year, zerointerest-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 AG for the
two purchases on January 1, 2019.
b. Record the interest at the end of the first year on both notes.

E14.15. ) (Entries for Retirement and Issuance of Bonds) On June 30, 2011, Mendenhal plc
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, 2019. 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, 2020, 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, 2020. Unamortized discount is £78,979.
b. Prepare the entry required on December 31, 2020, to record the payment of the first 6 months'
interest and the amortization of premium on the bonds

FA2 TUT 4
E21.1(Lessee Entries; No Residual Value) DU Journeys enters into an agreement with Traveler
plc to lease a car on December 31, 2018. The following information relates to this agreement.
1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option.
The remaining economic life of the car is 3 years, and it is expected to have no residual value at
the end of the lease term.
2. The fair value of the car was £15,000 at commencement of the lease.
3. Annual payments are required to be made on December 31 at the end of each year of the lease,
beginning December 31, 2019. The first payment is to be of an amount of £5,552.82, with each
payment increasing by a constant rate of 5% from the previous payment (i.e., the second
payment will be £5,830.46 and the third and final payment will be £6,121.98).
4. DU Journeys' incremental borrowing rate is 8%. The rate implicit in the lease is unknown.
5. DU Journeys uses straight-line depreciation for all similar cars.
Instructions
a. Prepare DU Journeys' journal entries for 2018, 2019, and 2020.
b. Assume, instead of a constant rate of increase, the annual lease payments will increase
according to a price index. At its current level, the price index stipulates that the first rental
payment should be £5,820. What would be the impact on the journal entries made by DU
Journeys at commencement of the lease, as well as for subsequent years?
E21.2 (Lessee Entries; Lease with Unguaranteed Residual Value) On December 31, 2018, Burke
Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Burke
to make annual payments of $8,668 at the beginning of each year, starting December 31, 2018. The
machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine
reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of
depreciation for all of its plant assets. Burke's incremental borrowing rate is 5%, and the lessor's implicit
rate is unknown.

Instructions

a. Compute the present value of the lease payments.

b. Prepare all necessary journal entries for Burke for this lease through December 31, 2019.

E21.3 (Lessee Computations and Entries; Lease with Guaranteed Residual Value) Delaney
AG leases an automobile with a fair value of €10,000 from Simon Motors, on the following
terms.
1. Non-cancelable term of 50 months.
2. Rental of €200 per month (at the beginning of each month). (The present value at 0.5% per
month is €8,873.)
3. Delaney guarantees a residual value of €1,180 (the present value at 0.5% per month is €920).
Delaney expects the probable residual value to be €1,180 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Delaney's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is
unknown.
Instructions
a. What is the present value of the lease payments to determine the lease liability?
b. Based on the original fact pattern, record the lease on Delaney's books at the date of
commencement.
c. Record the first month's lease payment (at commencement of the lease).
d. Record the second month's lease payment.
e. Record the first month's amortization on Delaney's books (assume straight-line).
f. Suppose that instead of €1,180, Delaney expects the residual value to be only €500 (the
guaranteed amount is still €1,180). How does the calculation of the present value of the lease
payments change from part E21.3b.?
E21.6 (Lessor Entries; Sales-Type Lease with Option to Purchase) Castle Leasing Company
signs a lease agreement on January 1, 2019, to lease electronic equipment to Jan Way Company.
The term of the non-cancelable lease is 2 years, and payments are required at the end of each
year.
The following information relates to this agreement.
1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease.
It is
not reasonably certain that Jan Way will exercise this option.
2. The equipment has a cost of $120,000 and fair value of $160,000 to Castle Leasing. The
useful
economic life is 2 years, with a residual value of $16,000.
3. Castle Leasing desires to earn a return of 5% on its investment.
4. Collectibility of the payments by Castle Leasing is probable
Instructions
a. Prepare the journal entries on the books of Castle Leasing to reflect the payments received
under
the lease and to recognize income for the years 2019 and 2020.
b. Assuming that Jan Way exercises its option to purchase the equipment on December 31, 2020,
prepare the journal entry to record the sale on Castle Leasing's books.
E21.12 (Lessee-Lessor Entries; Sales-Type Lease with Bargain Purchase Option) On
January 1, 2019, Bensen Company leased equipment to Flynn Corporation. The following
information pertains to this lease.
1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the
option to purchase the equipment for $1,000, while the expected residual value at the end of the
lease is $5,000.
2. Equal rental payments are due on January 1 of each year, beginning in 2019.
3. The fair value of the equipment on January 1, 2019, is $150,000, and its cost is $120,000.
4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a
straight-line basis.
5. Bensen set the annual rental to ensure a 5% rate of return. Flynn's incremental borrowing rate
is 6%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments by the lessor is probable.
Instructions
(Both the lessor and the lessee's accounting periods end on December 31.)
a. Discuss the nature of this lease to Bensen.
b. Calculate the amount of the annual rental payment.
c. Prepare all the necessary journal entries for Bensen for 2019.
d. Suppose the collectibility of the lease payments was not probable for Bensen. Prepare all
necessary journal entries for the company in 2019.
e. Prepare all the necessary journal entries for Flynn for 2019.
f. Discuss the effect on the journal entry for Flynn at lease commencement, assuming initial
direct costs of $2,000 are incurred by Flynn to negotiate the lease.