Exercise 10-5B Journal entries for a line of credit

Accounting for Long-Term Debt

Exercise 10-5B Journal entries for a line of credit

Colson Company has a line of credit with Federal Bank. Colson can borrow up to $800,000 at any time over the course of the Year 1 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first four months of Year 1. Colson agreed to pay interest at an annual rate equal to 2 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Colson pays 6 percent (4 percent + 2 percent) annual interest on $80,000 for the month of January.

Required
Provide all journal entries pertaining to Colson’s line of credit for the first four months of Year 1.

Exercise 10-6B Two accounting cycles for bonds issued at face value

Pluto Company issued $300,000 of 20-year, 6 percent bonds on January 1, Year 1. The bonds were issued at face value. Interest is payable in cash on December 31 of each year. Pluto immediately invested the proceeds from the bond issue in land. The land was leased for an annual $50,000 of cash revenue, which was collected on December 31 of each year, beginning December 31, Year 1.

Required
a. Prepare the journal entries and appropriate closing entries for these events and post them to T-accounts for Year 1 and Year 2.
b. Prepare the income statement, balance sheet, and statement of cash flows for Year 1 and Year 2.

Exercise 10-7B Two accounting cycles for bonds issued at face value

On January 1, Year 1, Hazman Corp. issued $200,000 of 10-year, 6 percent bonds at their face value. Interest is payable on December 31 of each year with the first payment due December 31, Year 1.

Required
Prepare all the general journal entries related to these bonds for Year 1 and Year 2.

Exercise 10-8B Journal entries for callable bonds

Tyler Co. issued $250,000 of 6 percent, 10-year, callable bonds on January 1, Year 1, at their face value. The call premium was 2 percent (bonds are callable at 102). Interest was payable annually on December 31. The bonds were called on December 31, Year 4.

Required
Prepare the journal entries to record the bond issue on January 1, Year 1, and the bond redemption on December 31, Year 4. Entries to accrue and pay interest are not required.

Exercise 10-9B Annual versus semiannual interest for bonds issued at face value

Jupiter Co. issued bonds with a face value of $150,000 on January 1, Year 1. The bonds had a 6 percent stated rate of interest and a five-year term. The bonds were issued at face value.

Required
a. What total amount of interest will Jupiter pay in Year 1 if bond interest is paid annually each December 31?
b. What total amount of interest will Jupiter pay in Year 1 if bond interest is paid semiannually each June 30 and December 31?
c. Write a memo explaining which option Jupiter would prefer.