Concept explainers
1.
Record the sale of the bonds
1.
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
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:
Calculate present value of principal amount.
Calculate present value of interest expense amount.
Calculate the premium on bonds payable:
2.
Record the issuance of stock
2.
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, credittreasury 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:
Calculate the value of common stock:
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Chapter 11 Solutions
Financial Accounting
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