Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter 10, Problem 5PSB

1.

To determine

To prepare:

Journal entry to record the bonds’ issuance.

1.

Expert Solution
Check Mark

Explanation of Solution

Issue of bonds at discount on January 1, 2015

Date Account Title and Explanation Post.
Ref.
Debit
($)
Credit
($)
January 1 Cash   198,494  
  Discount on bonds payable   41,506  
  Bonds payable     240,000
  (To record the sold bonds at discount)      

Table (1)

• Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.

• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which decrease the liabilities of the company. So, debit the discount on bonds payable account.

• Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.

Working Note:

Given,

Value of bonds is $240,000.

Market value of bonds is $198,494.

Calculation of amount of the discount on bonds payable:

Discountonbonds=ValueofbondMarketvalueofbond=$240,000$198,494=$41,506

2.

To determine

Net expense of interest on bond.

2.

Expert Solution
Check Mark

Explanation of Solution

Prepare table to compute interest expense as follow:

Particulars Amounts
($)
Amount repaid:  
Interest payment 216,000
Add: Maturity value 240,000
Repaid amount 456,000
Less: Borrowed amount 198,494
Net expense of interest on bond 257,506

Table (2)

Hence, net expense interest on bond is $257,506.

Working notes:

Given,

Value of bond is $240,000.

Rate of interest is 6%.

Time period is 0.5.

Calculation of amount of the interest paid at semiannual period:

Interestamount=Valueofthebond×Rateofinterest×Timeperiod=$240,000×6%×0.5=$7,200

Calculation of amount of interest repaid:

Interestpayment=Interestsemiannualamount×Numberofpaymentperiod=$7,200×30=$216,000

3.

To determine

First two year of an amortization table.

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare table to compute unamortized discount, and carrying value as follow:

End of semiannual period Unamortized
Discount
($)
Carrying Value
($)
January 1, 2015 41,506 198,494
June 30, 2015 40,122 199,878
December 31, 2015 38,738 201,262
June 30, 2016 37,354 202,646
December 31, 2016 35,970 204,030

Table (3)

Hence, unamortized discount on December 31, 2016 is $35,970 and carrying value account is $204,030.

4.

To determine

To prepare:

Journal entry to record the first two interest payment.

4.

Expert Solution
Check Mark

Explanation of Solution

Payment of interest on June 30, 2015

Date Account Title and Explanation Post.
Ref.
Debit
($)
Credit
($)
June 30 Bonds interest expense   8,584  
  Discount on bonds payable     1,384
  Cash     7,200
  (To record the paid semiannual interest and record amortization)      

Table (4)

• Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account.

• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount on bonds payable account.

• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.

Payment of interest on December 31, 2015

Date Account Title and Explanation Post.
Ref.
Debit
($)
Credit
($)
Dec 31 Bonds interest expense   8,584  
  Discount on bonds payable     1,384
  Cash     7,200
  (To record the paid semiannual interest and record amortization)      

Table (5)

• Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account.

• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount on bonds payable account.

• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.

Working note:

Given,

Unamortized capital on January 1, 2015 is 41,506.

Semiannual period is 30.

Calculation of unamortized discount:

Unamortizeddiscount=UnamortizeddiscountonJanuary2015Numberofsemiannualperiod=$41,50630=$1,384

5.

To determine

Change affect the amount reported on legacy’s financial statement.

5.

Expert Solution
Check Mark

Explanation of Solution

• If the bonds are issued at the 4% instead of the 8%, then bonds will be issued at premium. As the rate of interest on account for 5% which is more than rate of return in the new market.

• The change in the market rate of interest increases the bond liability of the company in the balance sheet. But, the bond liability decreases gradually with amortization of the premium.

• In this case, the cash flow statement will show greater amount pertain to receipt of the cash during the year under the borrowing head.

Working Note:

Given,

Total discount on bonds payable is $32,819.

Number of payment is 8.

Calculation of discount on bond payable on the first two bond expense:

Discountonbondpayable=TotaldiscountonbondpayableNumberofpayment=$32,8198=$4,102

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Chapter 10 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

Ch. 10 - Prob. 6DQCh. 10 - Prob. 7DQCh. 10 - Prob. 8DQCh. 10 - Prob. 9DQCh. 10 - Prob. 10DQCh. 10 - What is the issue price of a $2,000 bond sold at...Ch. 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. 1PSACh. 10 - Prob. 2PSACh. 10 - Prob. 3PSACh. 10 - Prob. 4PSACh. 10 - Prob. 5PSACh. 10 - Prob. 6PSACh. 10 - Prob. 7PSACh. 10 - Prob. 8PSACh. 10 - Prob. 9PSACh. 10 - Prob. 10PSACh. 10 - Prob. 11PSACh. 10 - Prob. 1PSBCh. 10 - Prob. 2PSBCh. 10 - Prob. 3PSBCh. 10 - Prob. 4PSBCh. 10 - Prob. 5PSBCh. 10 - Prob. 6PSBCh. 10 - Prob. 7PSBCh. 10 - Prob. 8PSBCh. 10 - Prob. 9PSBCh. 10 - Prob. 10PSBCh. 10 - Prob. 11PSBCh. 10 - Prob. 10SPCh. 10 - Prob. 1BTNCh. 10 - Prob. 2BTNCh. 10 - Prob. 3BTNCh. 10 - Prob. 4BTNCh. 10 - Prob. 5BTNCh. 10 - Prob. 6BTNCh. 10 - Prob. 7BTNCh. 10 - Prob. 8BTNCh. 10 - Prob. 9BTN
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