Connect Online Access for Financial Accounting
Connect Online Access for Financial Accounting
18th Edition
ISBN: 9781260706260
Author: Author
Publisher: Mcgraw-hill Higher Education (us)
Question
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Chapter 10, Problem 6BP

a)

To determine

Prepare the Adjusting entries at December 31, 2018, and the journal entry to record the payment of bond interest on March 1, 2019, under each of the following assumptions.

1. The bonds were issued at 98. (Round to nearest dollar.)

2. The bonds were issued at 104. (Round to nearest dollar.)

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.

Bond discount: Bond discount is the amount by which the selling price (or issue price or market price) of the bond is lower than the face value of the bond.

Bond premium: Bond discount is the amount by which the selling price (or issue price or market price) of the bond is more than the face value of the bond.

Prepare the Adjusting entries at December 31, 2018, and the journal entry to record the payment of bond interest on March 1, 2019:

1. The bonds were issued at 98. (Round to nearest dollar.)

DateAccount title and ExplanationPost Ref.

Debit

($)

Credit

($)

December 31, 2018Bond Interest Expense (1)203,333
Discount on Bonds Payable3,333
Bond Interest Payable200,000
(To record the adjusting entry for the year end December 31, 2018)
March 1, 2019Bond Interest Payable200,000
Bond Interest expense101,667
Discount on Bonds payable (2)1,667
Cash300,000
(To record semiannual bond interest payment and interest expense for two months)

Table (1)

December 31, 2018:

  • Bond interest expense (decreases the equity) is increased. Thus, it is debited.
  • Discount on bonds payable (contra liability account) is decreased. Thus, it is credited.
  • Bond interest payable (liability) is increased. Thus, it is credited.

March 1, 2019:

  • Bond interest payable (liability) is decreased. Thus, it is debited.
  • Bond interest expense (decreases the equity) is increased. Thus, it is debited.
  • Discount on bonds payable (contra liability account) is decreased. Thus, it is credited.
  • Cash (asset) is decreased. Thus, it is credited.

Working note:

Calculate the bond interest payable as on December 31, 2018:

 Bond Interest ($5,000,000×12%×[4÷12months])$200,000
Add: Discount amortization ($100,000×[4÷120months])3,333
Bond interest expense as on December 31, 2018$203,333

(1)

Table (2)

Calculate the discount amortization for 2 months (January, February):

Discount amortization=$100,000×(2÷120months)=$1,667 (2)

2. The bonds were issued at 104. (Round to nearest dollar.)

DateAccount title and ExplanationPost Ref.

Debit

($)

Credit

($)

December 31, 2018Bond Interest Expense (3)193,333
Premium on Bonds Payable6,667
Bond Interest Payable200,000
(To record the adjusting entry for the year end December 31, 2018)
March 1, 2019Bond Interest Payable200,000
Bond Interest expense96,667
Premium on Bonds payable (4)3,333
Cash300,000
(To record semiannual bond interest payment and interest expense for two months)

Table (3)

December 31, 2018:

  • Bond interest expense (decreases the equity) is increased. Thus, it is debited.
  • Premium on bonds payable (liability) is decreased. Thus, it is debited.
  • Bond interest payable (liability) is increased. Thus, it is credited.

March 1, 2019:

  • Bond interest payable (liability) is decreased. Thus, it is debited.
  • Bond interest expense (decreases the equity) is increased. Thus, it is debited.
  • Premium on bonds payable (liability) is decreased. Thus, it is debited.
  • Cash (asset) is decreased. Thus, it is credited.

Working note:

Calculate the bond interest payable as on December 31, 2018:

 Bond Interest ($5,000,000×12%×[4÷12months])$200,000
Less: Premium amortization ($200,000×[4÷120months])6,667
Bond interest expense as on December 31, 2018$193,333

(3)

Table (4)

Calculate the premium amortization for 2 months (January, February):

Premium amortization=$200,000×(2÷120months)=$3,333 (4)

b)

To determine

Compute the net bond liability at December 31, 2019, under assumptions 1 and 2.

b)

Expert Solution
Check Mark

Explanation of Solution

Compute the net bond liability at December 31, 2019, under assumptions 1 and 2:

 Bonds issued at $98Bonds issued at $104
Bond payable$5,000,000$5,000,000
Less: Discount on bonds payable (5)(86,667) 
Add: Premium on bonds payable (6)173,333
Net bond liability$4,913,333$5,173,333

Table (5)

Therefore, the net bond liability $98 is $4,913,333 and at $104 is $5,173,333.

Working notes:

Calculate the discount amortized on bonds payable as on December 31, 2019:

Total discount on bonds payable ($5million×($100$98) ×$100)$100,000
Amount amortized in 2018($100,000×[4÷120months])3,333
Amount amortized in 2019 ($100,000×[12÷120months])10,000
Discount amortized as on December 31, 2018 (B)$13,333

(5)

Table (6)

Calculate the premium amortized on bonds payable as on December 31, 2019

Total discount on bonds payable ($5million×($104$100) ×$100)$200,000
Premium amortized in 2018($200,000×[4÷120months])6,667
Premium amortized in 2019 ($200,000×[12÷120months])20,000
Discount amortized as on December 31, 2018 (B)$26,667

(6)

Table (7)

c)

To determine

Find the assumption in part a, in which the investor’s effective rate of interest is higher, explain the same.

c)

Expert Solution
Check Mark

Explanation of Solution

Under the assumption 1 of part a, the effective rate of interest would be higher because the investors will pay less for bonds with a given rate of interest, the higher the effective interest rate the investors’ will earn.

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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...
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