Chapter 11, Problem 1DCOMP

1.

To determine

Record the sale of the bonds

Explanation of Solution

Bonds:

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Prepare journal entry to record the sale of bonds using a premium account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
	Cash (1)	1,135,907
	Premium on bonds payable (5)		135,907
	Bonds payable		1,000,000
	(To record the sale of bonds )

Table (1)

• Cash is an asset and it is increased. Therefore debit cash account by 1,135,907
• Premium on bonds payable is an adjunct liability and it is increased. Therefore credit premium on bonds payable by $135,907
• Bonds payable is a liability and it is increased. Therefore credit bonds payable by $1,000,000.

Prepare journal entry to record the sale of bonds without using a premium account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
	Cash (1)	1,135,907
	Bonds payable		1,135,907
	(To record the sale of bonds )

Table (2)

• Cash is an asset and it is increased. Therefore debit cash account by 1,135,907
• Bonds payable is a liability and it is increased. Therefore credit bonds payable by $1,135,907.

Working notes:

Calculate the issue price of bonds:

Particulars	Amount ($)
Interest amount (2)	50,000
Present value of principal amount (3)	456,390
Present value of interest expense amount (4)	679,517
Issue price	1,135,907

Table (3)

(1)

Calculate the Interest expense amount:

$\begin{array}{c}\text{Interest}\text{expense}\text{amount}\text{=}\text{Face}\text{amount×Interest}\text{rate×Time}\text{period}\\ \text{=}\text{\$1,000,000×10\%×}\frac{\text{6}}{\text{12}}\\ \text{=}\text{\$50,000}\end{array}$ (2)

Calculate present value of principal amount.

$\begin{array}{c}\text{Present}\text{value}\text{of}\text{principal}\text{amount}\text{=}\frac{\text{1}}{{\left(\text{1+i}\right)}^{\text{n}}}\text{×Amount}\left(\text{Face}\text{value}\text{of}\text{bond}\right)\\ \text{=}\frac{\text{1}}{{\left(\text{1+4\%}\right)}^{\text{20}}}\text{×\$1,000,000}\\ \text{=}\text{0}\text{.45639×\$1,000,000}\\ \text{=}\text{\$456,390}\end{array}$ (3)

Calculate present value of interest expense amount.

$\begin{array}{c}\text{Present}\text{value}\text{of}\text{interest}\text{expense}\text{amount}\text{=}\frac{\text{1}-{\left(\text{1+i}\right)}^{\text{-n}}}{\text{i}}\text{×}\text{Amount}\left(\text{Interest}\right)\\ \text{=}\frac{\text{1}-{\left(\text{1+0}\text{.04}\right)}^{\text{-20}}}{\text{4\%}}\text{×\$50,000}\\ \text{=}\text{13}\text{.59033×\$50,000}\\ \text{= \$679,517}\end{array}$ (4)

Calculate the premium on bonds payable:

$\begin{array}{c}\text{Premium}\text{on}\text{bonds}\text{payable}\text{=}\text{Issue}\text{price}\text{of}\text{bond}-\text{Face}\text{value}\text{of}\text{bond}\\ \text{=}\text{\$1,135,907}-\text{\$1,000,000}\\ \text{=}\text{\$135,907}\end{array}$ (5)

2.

To determine

Record the issuance of stock

Explanation of Solution

Issuance of stock:

It refers to the number of shares that are sold to the stockholders from number of shares authorized for issuance by the company.

Prepare journal entry to record issuance of stock.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
	Cash (6)	1,125,000
	Common stock (7)		45,000
	Additional paid-in capital		1,080,000
	(To record the issuance of stock)

Table (4)

• Cash is an asset and it is increased. Therefore debit cash account by $1,125,000
• Common stock is a component of stockholders equity and it is increased. Therefore, credit treasury stock by $45,000
• Additional paid-in capital is a component of stockholders equity and it is increased. Therefore, credit additional paid-in capital by $1,080,000.

Working notes:

Calculate the value of cash:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{shares}\text{issued×Market}\text{value}\text{of}\text{per}\text{share}\\ \text{=}\text{45,000shares×\$25}\\ \text{=}\text{\$1,125,000}\end{array}$ (6)

Calculate the value of common stock:

$\begin{array}{c}\text{Common}\text{stock}\text{=}\text{Number}\text{of}\text{shares}\text{issued×Par}\text{value}\text{of}\text{per}\text{share}\\ \text{=}\text{45,000shares×\$1}\\ \text{=}\text{\$45,000}\end{array}$ (7)