(1)
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
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
(1)
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.
Hence, cash received amount is $383,500.
(1)
Calculate discount on bonds payable.
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 $400,000.
(2)
To Prepare: The journal entry to record the payment of interest and amortization of discount.
(2)
Explanation of Solution
Prepare journal entry to record payment of interest and amortization of discount on December 31, 2018.
Date | Account Title and Explanation | Debit ($) |
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.
Hence, interest paid amount is $20,000.
(3)
Calculate discount on bonds payable.
Hence, discount on bonds payable amount is $750.
(4)
Calculate the interest expense on the bond as on December 31, 2018.
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.
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 $75.
(3)
To Prepare: The journal entry to record payment of interest and amortization of discount on June 30, 2019.
(3)
Explanation of Solution
The following is the journal entry for payment of interest and amortization of discounton June 30, 2019:
Date | Account Title and Explanation | Debit ($) |
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.
Hence, interest paid amount is $20,000.
(7)
Calculate discount on bonds payable.
Hence, discount on bonds payable amount is $750.
(8)
Calculate the interest expense on the bond as on June 30, 2019.
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.
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 $75.
(4)
To Prepare: The journal entry to record the call of the bonds.
(4)
Explanation of Solution
The following is the journal entry to record the call of the bonds:
Date | Accounts and Explanations | Debit ($) |
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.
Hence, discount on bonds payable amount is $13,500.
(11)
Calculate remaining debt issue costs.
Hence, debt issue costs amount is $1,350.
(12)
Calculate the amount of loss on early extinguishment.
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
INTERMEDIATE ACCOUNTING RMU 9TH EDITION
- Required Information Exercise 10-7 (Algo) Straight-Line: Amortization table and bond interest expense LO P2 [The following Information applies to the questions displayed below.] Duval Company Issues four-year bonds with a $118,000 par value on January 1, 2021, at a price of $113,864. The annual contract rate is 6%, and Interest is paid semiannually on June 30 and December 31. Exercise 10-7 (Algo) Part 1 1. Prepare a straight-line amortization table for these bonds. Note: Round your answers to the nearest dollar amount. Semiannual Period-End Unamortized Discount Carrying Value 1/01/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023 6/30/2024 12/31/2024arrow_forwardProblem #2 WAPA issued $15,000,000, 7.8%, 20-vear bonds to vield 9% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14.233,448. Using effective-interest amortization, answer the following questions: (2a) Complete the following chart: Discount Amort. Carrying Amo Dates Cash Paid Interest Expense Jan 1, 2020 June 30, 2020 December 31, 2020 June 30, 2021 December 31, 2021 (2b) Provide the journal entry on for December 2021:arrow_forwardProblem 14-3 (Algo) Straight-line and effective interest compared [LO14-2] On January 1, 2024, Reyes Recreational Products issued $150,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $145,153 to yield an annual return of 10%. Required: 1. Prepare an amortization schedule that determines interest at the effective interest rate. 2. Prepare an amortization schedule by the straight-line method. 3. Prepare the journal entries to record interest expense on June 30, 2026, by each of the two approaches. 5. Assuming the market rate is still 10%, what price would a second investor pay the first investor on June 30, 2026, for $15,000 of the bonds? Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)arrow_forward
- d. 3,740,400 Problem 6-17 (AICPA Adapted) On January 1, 2020, Wolf Company issued 10% bonds in the face amount of P5,000,000, which mature on January 1, 2030. The bonds were issued for P5,675,000 to yield 8%, resulting in bond premium of P675,000. The entity used the interest method of amortizing bond premium. Interest is payable annually on December 31. 1. On December 31, 2020, what is the balance of the premium on bonds payable? a. 675,000 b. 629,000 c. 607,500 d. 507,500 2. What is the carrying amount of bonds payable on December 31, 2020? a. 5,000,000 b. 5,629,000 c. 4,371,000 d. 5,675,000 231arrow_forward! Required information Problem 10-10AB (Algo) Effective Interest: Amortization of bond LO P5 [The following information applies to the questions displayed below.] Ike issues $90,000 of 11%, three-year bonds dated January 1, 2020, that pay interest semiannually on June 30 and December 31. They are issued at $92,283 when the market rate is 10%. Problem 10-10AB (Algo) Part 2 2. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life. Total bond interest expense over life of bonds: Amount repaid: Total repaid payments of Par value at maturity Less amount borrowed 0 Total bond interest expense $ 0arrow_forwardProblem 5-15 (Algo) Bonds and leases; deferred annuities [LO5-3, 5-8, 5-10] On the last day of its fiscal year ending December 31, 2024, the Safe & Reliable (S&R) Glass Company completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. 1. S&R issued 7% stated rate bonds with a face amount of $100 million. The bonds mature on December 31, 2044 (20 years). The market rate of interest for similar bond issues was 8% (4.0% semiannual rate). Interest is paid semiannually (3.5%) on June 30 and December 31, beginning on June 30, 2025. 2. The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of $360,000 beginning on January 1, 2025. Lease B also is for 20 years, beginning January 1, 2025. Terms of the lease require 17 annual lease payments of $380,000 beginning on January 1, 2028. Generally accepted accounting principles require both leases to be recorded as liabilities for the present value…arrow_forward
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