Financial Accounting Fundamentals:
Financial Accounting Fundamentals:
5th Edition
ISBN: 9780078025754
Author: John Wild
Publisher: McGraw-Hill/Irwin
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Chapter 10, Problem 5AP

1.

To determine

Prepare the journal entry to record issuance of bonds payable at discount on January 1, 2015.

1.

Expert Solution
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Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented 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.

Prepare journal entry for issuance of bonds payable on January 1, 2015.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
2015Cash 292,181 
January 1Discount on Bonds Payable32,819 (1) 
 Bonds Payable  325,000
    (To record issuance of bonds payable at discount) 

Table (1)

Working Note:

Calculate the amount of total bonds discount.

Par value of bonds = $325,000

Issue price of bonds = $292,181

Total bonds discount = Parvalue of bondsCash received from issued of bonds=$325,000$292,181=$32,819 (1)

Description:

  • Cash is an asset and it is increased. So, debit it by $292,181.
  • Discount on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $32,819.
  • Bonds payable is a liability and it is increased. So, credit it by $325,000.

2.

To determine

Calculate the total bond interest expense that will be recognized over the life of the bonds.

2.

Expert Solution
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Explanation of Solution

Calculate the total bond interest expense.

DetailsAmount ($)
Total interest payments for 4 years (8 Semiannual payments)65,000 (2)
Add: Discounts32,819 (1)
Total bond interest expense97,819

Table (2)

Working Note:

Calculate the total interest payments for 4 years (semi-annually).

Total interest payments for4 years (semi-annually)]=(Par value×Interest rate×12)×8=($325,000×5%×12)×8=$8,125×8=$65,000 (2)

Conclusion

Therefore the total interest payment for 4 years (semi-annually) is $97,819.

3.

To determine

Prepare an amortization table for the first two years of the bonds using straight-line method to amortize the discount. 

3.

Expert Solution
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Explanation of Solution

Prepare an amortization table for the first two years of the bonds using straight-line method to amortize the discount.

DateDiscount Unamortized ($)Carrying Amount ($)
01/01/201532,819292,181
30/06/201528,717296,283
31/12/201524,615300,385
30/06/201620,513304,487
31/12/201616,411308,589

Table (3)

Note: The amortization of bond discount per interest payment is $4,102 (3).

Working Note:

Calculate amortization of bond discount per interest payment.

Total bonds discount = $32,819 (1)

Number of semiannual payments = 8 (4 years semiannual payments)

Amortization of bond discount per interest payment = Total bonds discountNumberofsemiannual =$32,8198=$4,102 (3)

4.

To determine

Prepare the journal entry to record semiannual interest and amortization of discount on bonds.

4.

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry for payment of semiannual interest and amortization of discount on bonds.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
2015Bond Interest Expense (5) 12,227 
June30 Discount on Bonds Payable  (3)  4,102
Cash (4) 8,125
    (To record semiannual payment of interest and amortization of discount on bonds)   

Table (4)

Working notes:

Calculate the amount of cash interest paid (semiannually).

Par value of bonds = $325,000

Interest rate = 5%

Cash interest=(Par value×Interest rate×Interest time period)=$325,000×5100×12=$8,125 (4)

Calculate the interest expense on the bond as on June 30, 2015.

InterestExpense=CashInterest +DiscountonBondsPayable=$8,125+$4,102=$12,227 (5)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $12,227.
  • Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $4,102.
  • Cash is an asset and it is decreased. So, credit it by $8,125.

Prepare journal entry for payment of semiannual interest and amortization of discount on bonds.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
2015Bond Interest Expense (6) 12,227 
December31 Discount on Bonds Payable  (3)  4,102
Cash (4) 8,125
    (To record semiannual payment of interest and amortization of discount on bonds)   

Table (5)

Working notes:

Calculate the interest expense on the bond as on December 31, 2015.

InterestExpense=CashInterest +DiscountonBondsPayable=$8,125+$4,102=$12,227 (6)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $12,227.
  • Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $4,102.
  • Cash is an asset and it is decreased. So, credit it by $8,125.

5.

To determine

Explain the changes on the amounts reported on the financial statements assuming the market rate on January 1, 2015 as 4% instead of 8%.

5.

Expert Solution
Check Mark

Explanation of Solution

If the market rate on January 1, 2015 is 4% instead of 8% then the bonds must have issued at a premium as the contract rate of 5% is higher than the changed market rate of 4%.

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Chapter 10 Solutions

Financial Accounting Fundamentals:

Ch. 10 - Prob. 6DQCh. 10 - Prob. 7DQCh. 10 - Prob. 8DQCh. 10 - Prob. 9DQCh. 10 - Prob. 10DQCh. 10 - Prob. 11DQCh. 10 - Prob. 12DQCh. 10 - Prob. 13DQCh. 10 - Prob. 14DQCh. 10 - Prob. 15DQCh. 10 - Prob. 16DQCh. 10 - Prob. 17DQCh. 10 - Prob. 18DQCh. 10 - Prob. 19DQCh. 10 - Prob. 20DQCh. 10 - Prob. 1QSCh. 10 - Prob. 2QSCh. 10 - Prob. 3QSCh. 10 - Prob. 4QSCh. 10 - Prob. 5QSCh. 10 - Prob. 6QSCh. 10 - Prob. 7QSCh. 10 - Prob. 8QSCh. 10 - Prob. 9QSCh. 10 - Prob. 10QSCh. 10 - Prob. 11QSCh. 10 - Prob. 12QSCh. 10 - Prob. 13QSCh. 10 - Prob. 14QSCh. 10 - Prob. 15QSCh. 10 - Prob. 16QSCh. 10 - Prob. 17QSCh. 10 - Prob. 18QSCh. 10 - Prob. 19QSCh. 10 - Prob. 20QSCh. 10 - Prob. 1ECh. 10 - Prob. 2ECh. 10 - Prob. 3ECh. 10 - Prob. 4ECh. 10 - Prob. 5ECh. 10 - Prob. 6ECh. 10 - Prob. 7ECh. 10 - Prob. 8ECh. 10 - Prob. 9ECh. 10 - Prob. 10ECh. 10 - Prob. 11ECh. 10 - Prob. 12ECh. 10 - Prob. 13ECh. 10 - Prob. 14ECh. 10 - Prob. 15ECh. 10 - Prob. 16ECh. 10 - Prob. 17ECh. 10 - Prob. 18ECh. 10 - Prob. 19ECh. 10 - Prob. 20ECh. 10 - Prob. 1APCh. 10 - Prob. 2APCh. 10 - Prob. 3APCh. 10 - Prob. 4APCh. 10 - Prob. 5APCh. 10 - Prob. 6APCh. 10 - Prob. 7APCh. 10 - Prob. 8APCh. 10 - Prob. 9APCh. 10 - Prob. 10APCh. 10 - Prob. 11APCh. 10 - Prob. 1BPCh. 10 - Prob. 2BPCh. 10 - Prob. 3BPCh. 10 - Prob. 4BPCh. 10 - Prob. 5BPCh. 10 - Prob. 6BPCh. 10 - Prob. 7BPCh. 10 - Prob. 8BPCh. 10 - Prob. 9BPCh. 10 - Prob. 10BPCh. 10 - Prob. 11BPCh. 10 - Prob. 10SPCh. 10 - Prob. 1BTNCh. 10 - Prob. 2BTNCh. 10 - Prob. 3BTNCh. 10 - Prob. 4BTNCh. 10 - Prob. 7BTNCh. 10 - Prob. 9BTN
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Financial Accounting - Long-term Liabilities - Bonds; Author: Finance & Accounting Videos by Prof Coram;https://www.youtube.com/watch?v=_1fwsJIGMos;License: Standard Youtube License