Connect Online Access for Financial Accounting
Connect Online Access for Financial Accounting
18th Edition
ISBN: 9781260706260
Author: Author
Publisher: Mcgraw-hill Higher Education (us)
bartleby

Concept explainers

Question
Book Icon
Chapter 10, Problem 5BP

a)

To determine

Prepare a journal entry to record the issuance of the bonds on September 1, 2018.

a)

Expert Solution
Check Mark

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.

Prepare a journal entry to record the issuance of the bonds on September 1, 2018:

DateAccount title and ExplanationPost Ref.

Debit

($)

Credit

($)

September 1, 2018Cash5,075,000
Bonds payable5,000.000
Bonds interest payable (1)75,000
(To record the issuance of bonds and 3 months accrued interest)

Table (1)

  • Cash (asset) is increased by $5,075,000. Thus, it is debited.
  • Bonds payable (liability) is increased by $5,000.000. Thus, it is credited.
  • Bonds interest payable (liability) is increased by 75,000. Thus, it is credited.

Working note:

The bonds were issued on September 1, 2018, at 100 plus three months’ accrued interest (June, July and August). Interest rate is 6%.

Calculate the bonds interest payable (3 months accrued interest):

3 months accrued Interest amount = Bond value×6×(3÷12months)=$5,000,000×6×(3÷12months)=$75,000 (1)

b)

To determine

Prepare a journal entry to record the first semi-annual interest payment on the issued bond on December 1, 2018.

b)

Expert Solution
Check Mark

Explanation of Solution

Interest: Interest is an amount paid on the issue price of the bonds by the company at stated dates at stated rate of interest.

Prepare a journal entry to record the first semi-annual interest payment on the issued bond on November 1, 2018:

DateAccount title and ExplanationPost Ref.

Debit

($)

Credit

($)

December  1, 2018Bonds interest payable(1)75,000
Bonds interest expense (2)75,000
Cash150,000
(To record the first semi-annual interest on bonds)

Table (1)

  • Bonds interest payable (liability) is decreased by 75,000. Thus, it is debited.
  • Bond interest expense (decreases the equity) is increased by $75,000. Thus, it is debited.
  • Cash (asset) is decreased by $150,000. Thus, it is credited.

Working note:

Calculate the bonds interest expense

From September 1 to December 1 (interest expense) three months interest expense is incurred.

Interest amount = Bond value×6×(3÷12months)=$5,000,000×6×(3÷12months)=$75,000 (2)

c)

To determine

Prepare a journal entry to record interest expense accrued through year-end on December 31, 2018.

c)

Expert Solution
Check Mark

Explanation of Solution

Accrued expenses: Accrued expenses are the expenses that have been incurred but have not been paid yet. These accrued expenses create accrued liabilities. For the portion of payment made, accrued liabilities would be reduced by way of passing an adjusting entry.

Example: Accrued salaries expense and accrued interest expense.

Prepare a journal entry to record interest expense accrued through year-end on December 31, 2018:

DateAccount title and ExplanationPost Ref.

Debit

($)

Credit

($)

December  31, 2018Bonds interest expense25,000
Bonds interest payable (3)25,000
(To record the issuance of bonds and 1 month accrued interest)

Table (1)

  • Bond interest expense (decreases the equity) is increased by $25,000. Thus, it is debited.
  • Bonds interest payable (liability) is increased by 25,000. Thus, it is credited.

Working note:

Calculate the accrued interest (1 month accrued interest):

1 month accrued Interest amount = Bond value×6×(1÷12months)=$5,000,000×6×(1÷12months)=$25,000 (3)

d)

To determine

Prepare a journal entry to record the second semi-annual interest payment on June 1, 2019.

d)

Expert Solution
Check Mark

Explanation of Solution

Prepare a journal entry to record the second semi-annual interest payment on the issued bonds on June 1, 2019:

DateAccount title and ExplanationPost Ref.

Debit

($)

Credit

($)

June  1, 2019Bonds interest payable(3)25,000
Bonds interest expense (4)125,000
Cash500,000
(To record the first semi-annual interest on bonds)

Table (1)

  • Bonds interest payable (liability) is decreased by 25,000. Thus, it is debited.
  • Bond interest expense (decreases the equity) is increased by $125,000. Thus, it is debited.
  • Cash (asset) is decreased by $150,000. Thus, it is credited.

Working note:

In the second semi-annual interest payment, 1 month interest is recorded as accrued interest for a year end adjustment. This adjustment entry is reversed and interest expense is calculated for remaining 5 months (January 1 to June 1).

Calculate the bonds interest expense:

Interest amount = Bond value×6×(5÷12months)=$5,000,000×6×(5÷12months)=$125,000 (5)

e)

To determine

Find the prevailing market rate of interest on the date that the bonds were issued and explain the same.

e)

Expert Solution
Check Mark

Explanation of Solution

6% is the prevailing market rate of interest on the date that the bonds were issued. The reason for it is the bonds were issued at par ($100) and the market rate had to have equalled the contract interest rate printed on the bonds.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 10 Solutions

Connect Online Access for Financial Accounting

Ch. 10 - 11. Deferred income taxes result from: Differences...Ch. 10 - Prob. 1DQCh. 10 - Prob. 2DQCh. 10 - Prob. 3DQCh. 10 - Prob. 4DQCh. 10 - Prob. 5DQCh. 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 - BRIEF EXERCISE 10.1 Cash Effects of...Ch. 10 - BRIEF EXERCISE 10.2 Effective Interest Rate One of...Ch. 10 - Prob. 3BECh. 10 - Prob. 4BECh. 10 - BRIEF EXERCISE 10.5 Recording Bonds Issued at a...Ch. 10 - Prob. 6BECh. 10 - Prob. 7BECh. 10 - Prob. 8BECh. 10 - Prob. 9BECh. 10 - Prob. 10BECh. 10 - Prob. 1ECh. 10 - EXERCISE 10.2 Effects of Transactions on the...Ch. 10 - Prob. 3ECh. 10 - EXERCISE 10.4 Employees—What Do They Really...Ch. 10 - EXERCISE 10.5 Accounting for Payroll...Ch. 10 - EXERCISE 10.6 Use of an Amortization Table Glen...Ch. 10 - Prob. 7ECh. 10 - EXERCISE 10.8 Bond Interest on Bonds Issued at...Ch. 10 - Prob. 9ECh. 10 - Prob. 10ECh. 10 - Prob. 11ECh. 10 - Prob. 12ECh. 10 - Prob. 13ECh. 10 - Prob. 14ECh. 10 - Prob. 15ECh. 10 - PROBLEM 10.1A Effects of Transactions on Financial...Ch. 10 - Prob. 2APCh. 10 - Prob. 3APCh. 10 - PROBLEM 10.4A Preparation and Use of an...Ch. 10 - Prob. 5APCh. 10 - Prob. 6APCh. 10 - Prob. 7APCh. 10 - Prob. 8APCh. 10 - Prob. 1BPCh. 10 - Prob. 2BPCh. 10 - Prob. 3BPCh. 10 - PROBLEM 10.4B Preparation and Use of an...Ch. 10 - Prob. 5BPCh. 10 - Prob. 6BPCh. 10 - PROBLEM 10.7B Reporting Liabilities in a Balance...Ch. 10 - PROBLEM 10.8B Financial Statement Presentation of...Ch. 10 - Prob. 1CTCCh. 10 - Prob. 2CTCCh. 10 - CASE 10.3 Loss Contingencies Discuss each of the...Ch. 10 - CASE 10.4 Off-Balance Sheet Financing Delta...
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education