P14-1 (Analysis of Amortization Schedule and Interest Entries) The amortization and interest schedule on page 692 reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2009, and the subsequent interest payments and charges. The companys year-end is December 31, and financial state- ments are prepared once yearly.

Instructions

(a) Prepare the journal entry at December 31 (Fallens 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 Fallens 2016 statement of financial position?

(c) What is the effect of recording the fair value option on these notes on Fallens 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 Fallens 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 Fallens income statement in 2015, 2016, and 2017?

9 E14-22 (Long-Term Debt Disclosure) At December 31, 2015, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2018. The second is a $6,000,000 bond issue which matures September 30, 2019. The third is a $12,500,000 sinking fund debenture with annual sinking fund payments of $2,500,000 in each of the years 2017 through 2021.

Amortization Schedule

Year Cash Interest 1/1/2009

2009 11,000 11,322

2010 11,000 11,361

2011 11,000 11,404

2012 11,000 11,452

2013 11,000 11,507

2014 11,000 11,567

2015 11,000 11,635

2016 11,000 11,712

2017 11,000

2018 11,000

Amount Unamortized

5,651 5,329 4,968 4,564 4,112 3,605 3,038 2,403 1,691

Book Value

11,797 894

11,894 100,000

94,349 94,671 95,032 95,436 95,888 96,395 96,962 97,597 98,309 99,106

34

Instructions

(a) Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.

(b) Determine the stated interest rate and the effective-interest rate.

(c) On the basis of the schedule, prepare the journal entry to record the issuance of the bonds on

January 1, 2009.

(d) On the basis of the schedule, prepare the journal entry or entries to reflect the bond transactions and

accruals for 2009. (Interest is paid January 1.)

(e) On the basis of the schedule, prepare the journal entry or entries to reflect the bond transactions and

accruals for 2016. Capulet Corporation does not use reversing entries.