Case Study:
On July 1, 2014, Lek Tech Corporation issued $20 million of 12%, 20-year bonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year, and the bonds were issued at a market interest rate of 8%.
Required:
1. Compute the bonds’ issue price on July 1, 2014.
2. Prepare an amortization schedule that shows interest expense, premium or discount amortization, bond carrying value, and cash interest payment for each interest payment period through June 30, 2019. 3. Prepare the journal entries to record all interest expense and all cash interest payments for 2015.
4. A new employee in the accounting group at Lek Tech has asked you to explain why interest expense on the bonds changes each year. Write a two-paragraph memo that helps the employee understand interest recognition for these bonds.
5. LekTech used the bonds’ proceeds to construct a new manufacturing facility near Waterloo, Iowa. The company will make taillight lenses for tractors manufactured by Deere & Company at its Waterloo plant. In fact, Deere has signed a letter guaranteeing payment of the LekTech bonds. How is the guarantee shown in Deere’s financial statements?
6. On July 1, 2019, the company exercised a call provision in the debenture agreement and redeemed 40% of the bonds at 105% of par. What journal entry did the company make to record this partial redemption?
7. The market yield for the bonds on July 1, 2019, was 10%. How much less did the company pay to retire bonds using the call provision than it would have paid using an open market purchase?