GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD
GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD
9th Edition
ISBN: 9781260089042
Author: J. David Spiceland
Publisher: McGraw-Hill Education
Question
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Chapter 14, Problem 14.16P

(1)

To determine

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.

Straight-line amortization bond

Straight line method of amortization is a process of amortizing premium on bond or discount on bond, which allocates the same amount of interest expense in each period of interest payment.

Early Extinguishment debt

When the debt obligations are retired before its scheduled maturity date, the transactions are referred to as early extinguishment of debt. The debt is paid at the market price of the debt and for any difference between the book value of the debt with its market price, the business recognizes the gain or loss on early extinguishment of the debt.

To Prepare: The journal entry to record the issuance of the bonds.

(1)

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry to record the issuance of the bonds as on 30th June 2018.

Date Account Title and Explanation

Debit

($)

Credit

($)

2018 Cash(1) 383,500  
June 30
    Debt Issue Costs 1,500  
    Discount on Bonds Payable (2) 15,000  
    Bonds Payable   400,000
    (To record the issue of bonds)    

Table (1)

Working notes:

Calculate the amount of cash received.

Cash received = Issue price of bonds – Debt issue costs= $385,000$1,500= $383,500

Hence, cash received amount is $383,500.

(1)

Calculate discount on bonds payable.

Discount on bonds payable =Bonds payable –Issue price of bonds=$400,000$385,000=$15,000

Hence, discount on bonds payable amount is $15,000.

(2)

  • Cash is an asset and it increases by $383,500. Therefore, debit cash account by $383,500.
  • Debt issue cost is a contra liability and it decreases by $1,500. Therefore, debit debt issue costs account by $1,500.
  • Discount on bonds payable is a contra liability and it decreases by $15,000. Therefore, debit discount on bonds payable account by $15,000.
  • Bonds payable is a long-term liability and it increases by $400,000. Therefore, credit bonds payable account by $400,000.

(2)

To determine

To Prepare: The journal entry to record the payment of interest and amortization of discount.

(2)

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry to record payment of interest and amortization of discount on December 31, 2018.

Date Account Title and Explanation

Debit

($)

Credit

 ($)

2018 Interest Expense (5) 20,750
December 31   Discount on Bonds Payable (4)   750
    Cash (3) 20,000
(To record payment of interest)

Table (2)

Working notes:

Calculate the amount of interest as on December 31, 2016.

Interest paid(Cashpaid)=(Face value×Stated interest rate×Interest time period)=$400,000×10%×612=$20,000

Hence, interest paid amount is $20,000.

(3)

Calculate discount on bonds payable.

 Discount on bonds payable =Total bonddiscount Number of discount=$15,00020=$750

Hence, discount on bonds payable amount is $750.

(4)

Calculate the interest expense on the bond as on December 31, 2018.

Interest expense=Cashpaid+Discounton bondspayable=$20,000+$750=$20,750

Hence, interest expense amount is $20,750.

(5)

  • Interest Expense is an expense and it decreases the value of equity. Therefore, debit interest expense account by $20,750.
  • Discount on bonds payable is a contra liability and it increases by $750. Therefore, credit discount on bonds payable account by $750.
  • Cash is an asset and it decreases by $20,000. Therefore, credit cash account by $20,000.

The following is the journal entry for amortization of debt issue costs on December 31, 2018

Date Account Title and Explanation

Debit

($)

Credit

 ($)

2018 Debt Issue Expense 75
December 31   Debt Issue Costs(6)   75
(To record amortization of debt issue costs)

Table (3)

Working note:

Calculate amortization of debt issue costs.

Amortization of debt issue costs =Total debt issue costs Number of period=$1,50020=$75

Hence, amortization of debt issue cost is $75.

(6)

  • Debt issue cost is an expense and it decreases the value of the equity. Therefore, debit debt issue costs account by $75.
  • Debt issue cost is acontra liabilityand it increases because a portion of cost is expensed by $1,500. Therefore, credit debt issue costs account by $75.

(3)

To determine

To Prepare: The journal entry to record payment of interest and amortization of discount on June 30, 2019.

(3)

Expert Solution
Check Mark

Explanation of Solution

The following is the journal entry for payment of interest and amortization of discounton June 30, 2019:

Date Account Title and Explanation

Debit

($)

Credit

 ($)

2019 Interest Expense (9) 20,750
June 30   Discount on Bonds Payable (8)   750
    Cash (7) 20,000
(To record payment of interest)

Table (4)

Working notes:

Calculate the amount of interest as on June 30, 2019.

Interest paid(Cashpaid)=(Face value×Stated interest rate×Interest time period)=$400,000×10%×612=$20,000

Hence, interest paid amount is $20,000.

(7)

Calculate discount on bonds payable.

 Discount on bonds payable =Total bonddiscount Number of discount=$15,00020=$750

Hence, discount on bonds payable amount is $750.

(8)

Calculate the interest expense on the bond as on June 30, 2019.

Interest expense=Cashpaid+Discounton bondspayable=$20,000+$750=$20,750

Hence, interest expense amount is $20,750.

(9)

  • Interest Expense is an expense and it decreases the value of equity. Therefore, debit interest expense account by $20,750.
  • Discount on bonds payable is a contra liability and it increases by $750. Therefore, credit discount on bonds payable account by $750.
  • Cash is an asset and it decreases by $20,000. Therefore, credit cash account by $20,000.

The following is the journal entry for amortization of debt issue costson June 30, 2019:

Date Account Title and Explanation

Debit

($)

Credit

 ($)

2019 Debt Issue Expense 75
June 30   Debt Issue Costs(10)   75
(To record amortization of debt issue costs)

Table (5)

Working note:

Calculate amortization of debt issue costs.

Amortization of debt issue costs =Total debt issue costs Number of period=$1,50020=$75

Hence, amortization of debt issue costs amount is $75.

(10)

  • Debt issue cost is an expense and it decreases the value of the equity. Therefore, debit debt issue costs account by $75.
  • Debt issue cost is a contra liability and it in decreases by $75 because a portion of costs is expensed. Therefore, credit debt issue costs account by $75.

(4)

To determine

To Prepare: The journal entry to record the call of the bonds.

(4)

Expert Solution
Check Mark

Explanation of Solution

The following is the journal entry to record the call of the bonds:

Date Accounts and Explanations

Debit

($)

Credit

 ($)

2019      
July 1 Bonds Payable 400,000  
    Loss on Early Extinguishment of Bonds (13) 9,850  
            Debt Issue Costs (12)   1,350
            Discount on Bonds Payable (11)   13,500
    Cash   395,000
    (To record early extinguishment of bonds)    

Table (6)

Working notes:

Calculate the amount of discount on bonds payable.

Discount on bonds payable =(Bonds payable –Issue price of bonds)×910=($400,000$385,000)×910=$13,500

Hence, discount on bonds payable amount is $13,500.

(11)

Calculate remaining debt issue costs.

Debt issue costs = $1,500×910=$1,350

Hence, debt issue costs amount is $1,350.

(12)

Calculate the amount of loss on early extinguishment.

Loss on early extinguishment  = (Cash paid + Discount on bonds payable +Debt issue costs– Bonds payable)=($395,000+$13,500+$1,350$400,000)=$9,850

Hence, loss on early extinguishment amount is $9,850.

(13)

  • Bonds payable is a liability account. The amount has decreased because the liability is paid off. Therefore, debit bonds payable account with $400,000.
  • Loss on early retirement of bonds is an expenseaccount. Loss decrease equity account. Therefore, debit loss on early retirement of bonds account with $9,850.
  • Debt issue cost is acontra liability asset and it increases by $1,350. Therefore, credit debt issue costs account by $1,350.
  • Discount on bonds payable is a contra liability account. The amount is increased because the carrying value of bonds payable is increased to amortize the discount. Therefore, credit discount on bonds payable account with $13,500.
  • Cash is an asset account. The amount has decreased because debt is paid; therefore, credit Cash account with $395,000.

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Chapter 14 Solutions

GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD

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