1.
Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.
Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.
Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note.
To Journalize: The entries to record the transactions.
1.
Explanation of Solution
Date | Accounts and Explanation | Post Ref. | Debit ($) |
Credit ($) |
2016 | Cash | 63,532,267 | ||
July 1 | Discount on Bonds Payable (1) | 10,467,733 | ||
Bonds Payable | 74,000,000 | |||
(To record issue of bonds at discount) | ||||
October 1 | Cash | 200,000 | ||
Notes Payable | 200,000 | |||
(To record issue of 6% notes for cash) | ||||
December 31 | Interest Expense | 3,000 | ||
Interest Payable | 3,000 | |||
(To record interest accrued on installment note) | ||||
December 31 | Interest Expense (4) | 4,331,693 | ||
Discount on Bonds Payable (2) | 261,693 | |||
Cash (3) | 4,070,000 | |||
(To record semiannual interest payment and amortization on bonds) |
Table (1)
Date | Accounts and Explanation | Post Ref. | Debit ($) |
Credit ($) |
2017 | Interest Expense (4) | 4,331,693 | ||
June 30 | Discount on Bonds Payable (2) | 261,693 | ||
Cash (3) | 4,070,000 | |||
(To record semiannual interest payment and amortization on bonds) | ||||
September 30 | Interest Expense | 9,000 | ||
Interest Payable | 3,000 | |||
Notes Payable | 28,673 | |||
Cash | 40,673 | |||
(To record the annual payment on note) | ||||
December 31 | Interest Expense | 2,570 | ||
Interest Payable | 2,570 | |||
To record interest accrued on installment note) | ||||
December 31 | Interest Expense (4) | 4,331,693 | ||
Discount on Bonds Payable (2) | 261,693 | |||
Cash (3) | 4,070,000 | |||
(To record semiannual interest payment and amortization on bonds) |
Table (2)
Date | Accounts and Explanation | Post Ref. | Debit ($) |
Credit ($) |
2018 | Bonds Payable | 74,000,000 | ||
June 30 | Loss on Redemption of Bonds (6) | 7,940,961 | ||
Discount on Bonds Payable | 9,420,961 | |||
Cash (5) | 72,520,000 | |||
(To record redemption of bonds) | ||||
September 30 | Interest Expense | 7,710 | ||
Interest Payable | 2,570 | |||
Notes Payable | 30,393 | |||
Cash | 40,673 | |||
(To record the annual payment on note) |
Table (3)
Working notes:
Calculate discount on bonds payable.
Calculate discount on bonds payable semiannually.
Calculate the amount of cash interest.
Calculate the interest expense on the bond.
Calculate cash paid to redeem the bonds.
Compute loss on the redemption of the bonds payable.
2016:
- On July 1, Cash is debited as it increased the asset. Discount on bonds payable is debited as it decreased the liability. Bonds payable is credited as it increased the liability.
- On October 1, Cash is debited as it increased the asset. Notes payable is credited as it increased the liability.
- On December 31, interest expense is debited as it decreases the equity value. Interest payable is credited as it increased the liability.
- On December 31, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
2017:
- On June 30, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
- On September 30, interest expense is debited as it decreases the equity value. Interest payable and notes payable are debited as it decreased the liability. Cash is credited as it decreased the asset.
- On December 31, interest expense is debited as it decreases the equity value. Interest payable is credited as it increased the liability.
- On December 31, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
2018:
- On June 30, Bonds payable is debited as it decreased liability. Loss on redemption of bonds is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
- On September 30, interest expense is debited as it decreases the equity value. Interest payable and notes payable are debited as it decreased the liability. Cash is credited as it decreased the asset.
2.
a.
The amount of interest expense in 2016.
2.
a.
Explanation of Solution
Determine the amount of interest expense in 2016.
b.
The amount of interest expense in 2017.
b.
Explanation of Solution
Determine the amount of interest expense in 2017.
3.
The carrying amount of bonds as of December 31, 2017.
3.
Explanation of Solution
Determine the carrying amount of bonds as of December 31, 2017.
Particulars | Amount ($) |
Initial carrying amount of bonds | 63,532,267 |
Discount amortized on December 31, 2016 | 261,693 |
Discount amortized on June 30, 2017 | 261,693 |
Discount amortized on December 31, 2017 | 261,693 |
Carrying amount of bonds, December 31, 2017 | 64,317,346 |
Table (4)
Want to see more full solutions like this?
Chapter 12 Solutions
Bundle: Financial & Managerial Accounting, Loose-leaf Version, 13th + CengageNOWv2, 1 term (6 months) Printed Access Card Corporate Financial ... Access Card for Managerial Accounting, 13th
- Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued 62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of 66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016.arrow_forwardAggies Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018, and received $540,000. Interest is payable semi-annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. Dec. 31, 2018: entry to record payment of interest to bondholders C. Dec. 31, 2018: entry to record amortization of premiumarrow_forwardDixon Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable annually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. June 30, 2019: entry to record payment of interest to bondholders C. June 30, 2019: entry to record amortization of discount D. June 30, 2020: entry to record payment of interest to bondholders E. June 30, 2020: entry to record amortization of discountarrow_forward
- Volunteer Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $540,000. Interest is payable annually. The premium is amortized using the straightline method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. June 30, 2019: entry to record payment of interest to bondholders C. June 30, 2019: entry to record amortization of premium D. June 30, 2020: entry to record payment of interest to bondholders E. June 30, 2020: entry to record amortization of premiumarrow_forwardChung Inc. issued $50,000 of 3-year bonds on January 1, 2018, with a stated rate of 4% and a market rate of 4%. The bonds paid interest semi-annually on June 30 and Dec. 31. How much money did the company receive when the bonds were issued? The bonds would be quoted at what rate?arrow_forward
- Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
- Financial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning