FINANCIAL ACCOUNTING (LL)-W/CONNECT
FINANCIAL ACCOUNTING (LL)-W/CONNECT
10th Edition
ISBN: 9781260696295
Author: Libby
Publisher: MCG
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Chapter 10, Problem 11P

1.

To determine

Prepare journal entry to record the sale of the bonds on January 1.

1.

Expert Solution
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Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Bond Premium: It occurs when the bonds are issued at a high price than the face value.

Effective-interest amortization method: Effective-interest amortization method is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

Prepare journal entry for the sale of the bonds on January 1.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
January 1Cash (1)321,976
Bond Premium (2)21,976
Bonds Payable 300,000
(To record issuance of bonds payable at premium)

Table (1)

  • Cash is an asset and it is increased. So, debit it by $321,976.
  • Bond Premium is an adjunct liability account and it is increased. So, credit it by $21,976.
  • Bonds payable is a liability and it is increased. So, credit it by $300,000.

Working notes:

Determine the issuance price of the bonds.

Step 1: Calculate the cash interest payment for bonds.

Cash interest payment=Face value×Coupon rate×Interest time period=$300,000×12%×312=$9,000

Step 2: Calculate the present value of cash interest payment.

ParticularsAmount
Interest payment (a)$9,000
PV factor at annual market interest rate of 2% for 8 periods (b)7.32548
Present value (a)×(b)$65,929

Table (2)

Note: The present value factor for 8 periods at 2% interest would be 7.32548 (Refer Appendix E (Table E.2) in the book for present value factor).

Step 3: Calculate the present value of single principal payment of $300,000 (principal amount) at 2% for 8 periods.

ParticularsAmount
Single principal payment (a)$300,000
PV factor at annual market interest rate of 2% for 8 periods (b)0.85349
Present value (a)×(b)$256,047

Table (3)

Note: The present value factor for 8 periods at 2% interest would be 0.85349 (Refer Appendix E (Table E.1) in the book for present value factor).

Step 4: Calculate the issue price of the bonds.

Issue price of the bonds =(Present value of interest payment + Present value of single principal payment)=($65,929(from table 1)+$256,047(from table 2))  =$321,976 (1)

Calculate the amount of bond premium.

Bond premium = (Cash receivedFace value )   =$321,976$300,000=$21,976 (2)

2.

To determine

Prepare journal entry to record payment of interest on March 31.

2.

Expert Solution
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Explanation of Solution

Prepare journal entry for payment of interest on March 31.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
March 31Interest Expense (4)6,440
 Bond Premium (5)2,560
Cash (3)9,000
(To record payment of interest)

Table (4)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $6,440.
  • Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,560.
  • Cash is an asset and it is decreased. So, credit it by $9,000.

Working notes:

Calculate cash interest payment.

Cash interest payment=Face value×Coupon rate×Interest time period=$300,000×12%×312=$9,000 (3)

Calculate interest expense.

Interest expense=Book value of bond ×Market interest×Time=$321,976×8%×312=$6,440 (4)

Calculate bond premium.

Bond premium=Cash interest paymentInterest Expense =$9,000$6,440=$2,560  (5)

To determine

Prepare Journal entry to record payment of interest on June 30.

Expert Solution
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Explanation of Solution

Prepare journal entry for payment of interest on June 30.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
June 30Interest Expense (7)6,388
 Bond Premium (8)2,612
Cash (6)9,000
(To record payment of interest)

Table (5)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $6,388.
  • Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,612.
  • Cash is an asset and it is decreased. So, credit it by $9,000.

Working notes:

Calculate cash interest payment.

Cash interest payment=Face value×Coupon rate×Interest time period=$300,000×12%×312=$9,000 (6)

Calculate interest expense.

Interest expense=Book value of bond ×Market interest×Time=($321,976$2,560)×8%×312=$6,388 (7)

Calculate bond premium.

Bond premium=Cash interest paymentInterest Expense =$9,000$6,388=$2,612  (8)

To determine

Prepare Journal entry to record payment of interest on September 30.

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry for payment of interest on September 30.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
September 30Interest Expense (10)6,336
 Bond Premium (11)2,664
Cash (9)9,000
(To record payment of interest)

Table (6)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $6,336.
  • Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,664.
  • Cash is an asset and it is decreased. So, credit it by $9,000.

Working notes:

Calculate cash interest payment.

Cash interest payment=Face value×Coupon rate×Interest time period=$300,000×12%×312=$9,000 (9)

Calculate interest expense.

Interest expense=Book value of bond ×Market interest×Time=($321,976$2,560$2,612)×8%×312=$6,336 (10)

Calculate bond Premium.

Bond premium=Cash interest paymentInterest Expense =$9,000$6,336=$2,664  (11)

To determine

Prepare journal entry to record payment of interest on December 31.

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry for payment of interest on December 31.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31Interest Expense (13)6,283
 Bond Premium (14)2,717
Cash (12)9,000
(To record payment of interest)

Table (7)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $6,283.
  • Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,717.
  • Cash is an asset and it is decreased. So, credit it by $9,000.

Working notes:

Calculate cash interest payment.

Cash interest payment=Face value×Coupon rate×Interest time period=$300,000×12%×312=$9,000 (12)

Calculate interest expense.

Interest expense=Book value of bond ×Market interest×Time=($321,976$2,560$2,612$2,664)×8%×312=$6,283 (13)

Calculate bond premium.

Bond premium=Cash interest paymentInterest Expense =$9,000$6,283=$2,717  (14)

3.

To determine

Show the presentation of bonds payable that would be reported on December 31 balance sheet.

3.

Expert Solution
Check Mark

Explanation of Solution

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

The presentation of bonds payable that would be reported on December 31 balance sheet is as shown below:

Corporation S

Balance Sheet (Partial)

As of December 31

Long-term Liabilities:
   Bonds Payable (15)$311,423

Table (8)

Working note:

Calculate the amount of bonds payable on December 31.

Bonds payable on December 31 =(Beginning book value of bondsPremium amortized on March 31Premium amortized on June 30Premium amortized on September 30Premium amortized on December 31)=($321,976$2,560$2,612$2,664$2,717)=$311,423 (15)

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Chapter 10 Solutions

FINANCIAL ACCOUNTING (LL)-W/CONNECT

Ch. 10 - 11. How is the debt-to-equity ratio computed? What...Ch. 10 - 12. When market interest rates increase, do bond...Ch. 10 - 1. Annual interest expense for a single bond issue...Ch. 10 - Which of the following is an advantage of issuing...Ch. 10 - 3. A bond with a face value of $100,000 has a...Ch. 10 - Prob. 4MCQCh. 10 - 5. Which of the following is false when a bond is...Ch. 10 - 6. A bond with a face value of $100,000 was issued...Ch. 10 - 7. To determine whether a bond will be sold at a...Ch. 10 - Prob. 8MCQCh. 10 - Prob. 9MCQCh. 10 - 10. When using the effective-interest method of...Ch. 10 - Prob. 1MECh. 10 - M10-2 Computing the Price of a Bond Issued at...Ch. 10 - Prob. 3MECh. 10 - M10-4 Computing the Times Interest Earned...Ch. 10 - Computing the Price of a Bond Issued at a...Ch. 10 - Recording the Issuance and Interest Payments of a...Ch. 10 - (Chapter Supplement) Recording the Issuance and...Ch. 10 - Computing the Price of a Bond Issued at a...Ch. 10 - Prob. 9MECh. 10 - (Chapter Supplement) Recording the Issuance and...Ch. 10 - Prob. 11MECh. 10 - (Chapter Supplement) Recording the Issuance and...Ch. 10 - Prob. 13MECh. 10 - M10-14 The Cash Flow Effects of Retiring Bonds and...Ch. 10 - E10-1 Interpreting Information Reported in the...Ch. 10 - Prob. 2ECh. 10 - E10-3 Computing Issue Prices of Bonds Sold at Par,...Ch. 10 - E10-4 Computing Issue Prices of Bonds Sold at Par,...Ch. 10 - Determining the Effects of Issuing Bonds on the...Ch. 10 - Analyzing Financial Ratios You have just started...Ch. 10 - Assume General Motors Corporation is planning to...Ch. 10 - Prob. 8ECh. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 10ECh. 10 - E10-11 Interpreting a Bond Amortization...Ch. 10 - E10-12 Explaining Why Debt Is Issued at a Price...Ch. 10 - E10-13 Recording and Reporting a Bond Issued at a...Ch. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 15ECh. 10 - Prob. 16ECh. 10 - Recording the Early Retirement of a Bond Several...Ch. 10 - Recording the Early Retirement of a Bond Issued at...Ch. 10 - (Chapter Supplement) Recording the Early...Ch. 10 - Prob. 20ECh. 10 - E10-21 (Chapter Supplement) Recording and...Ch. 10 - E10-22 Recording and Reporting a Bond Issued at a...Ch. 10 - E10-23 (Chapter Supplement) Recording and...Ch. 10 - Prob. 24ECh. 10 - Analyzing the Use of Debt Last year. Arbor...Ch. 10 - Prob. 2PCh. 10 - Comparing Bonds Issued at Par, at a Discount, and...Ch. 10 - Computing Issue Prices of Bonds Sold at Par, at a...Ch. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - Prob. 7PCh. 10 - Prob. 8PCh. 10 - Prob. 9PCh. 10 - Preparing a Bond Amortization Schedule for a Bond...Ch. 10 - Prob. 11PCh. 10 - Prob. 12PCh. 10 - P10-13 Recording the Early Retirement of a Bond...Ch. 10 - Prob. 14PCh. 10 - Prob. 15PCh. 10 - Prob. 16PCh. 10 - AP10-1 Reporting Bonds Issued at Par LO 10-2 On...Ch. 10 - Prob. 2APCh. 10 - Prob. 3APCh. 10 - Recording and Reporting a Bond Issued at a...Ch. 10 - (Chapter Supplement) Recording and Reporting a...Ch. 10 - Prob. 6APCh. 10 - AP10-7 Recording and Reporting a Bond Issued at a...Ch. 10 - Prob. 8APCh. 10 - Prob. 1CONCh. 10 - Finding Financial Information Refer to the...Ch. 10 - Prob. 2CPCh. 10 - Refer to the financial statements and footnotes of...Ch. 10 - Prob. 4CPCh. 10 - Prob. 5CPCh. 10 - Prob. 6CP
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