INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 14, Problem 14.24P

(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.

Accrued interest

The amount of interest that has already occurred, but the payment is not made yet, is known as accrued interest.

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.

To Prepare: The appropriate journal entries for these long – term bond investments.

(1)

Expert Solution
Check Mark

Explanation of Solution

Prepare necessary journal entries for long-term bond investment as on 1st July 2016.

Date Account Title and Explanation

Debit

($)

Credit

($)

2016 Bonds Investment 16,000,000  
July 1
            Discount on Bonds Investment   300,000
        Cash   15,700,000
    (To record the purchase of  B bonds)    

Table (1)

Working note:

Calculate discount on bonds investment.

Discount on bonds investment =Bonds investment –Cash paid=$16,000,000$15,700,000=$300,000

Hence, discount on bonds investment amount is $300,000.

Journal entry for purchases of F bonds as son 1st October 2016.

Date Account Title and Explanation

Debit

($)

Credit

($)

2016 Investment in Bonds 30,000,000  
October 1
    Premium on Bonds Investment 1,160,000  
    Interest Receivable 1,200,000  
        Cash   32,360,000
    (To record the purchase of  F bonds)    

Table (2)

Working notes:

Calculate the amount of interest receivable for 4 months (from June 1 to October 1).

Interest receivable = Bond investment × 12% ×412=$30,000,000×12%×412=$1,200,000

Hence, interest receivable amount is $1,200,000.

Calculate the amount of cash paid.

Cash paid = (Bonds investment + Premium on bonds investment + Interest receivable)=$30,000,000+1,160,000+$1,200,000=$32,360,000

Hence, cash paid amount is $32,360,000.

Journal entry for interest received on F bonds as son 31st December 2016.

Date Account Title and Explanation Debit ($) Credit ($)
2016 Cash 1,800,000
December 1
Premium on Bonds Investment 20,000
Interest Receivable 1,200,000
  Interest Revenue   580,000
        (To record interest received on F bonds)    

Table (3)

Working notes:

Calculate the amount of cash received.

Cash received = $30,000,000 × 6%= $1,800,000

Hence, cash received amount is $1,800,000.

Calculate premium on bonds investment.

 Premium on bonds investment per month=Total bondinvestmentpremium Number of premium in months=$1,160,000116months(10years4months)=$10,000

Premium on bonds investment for 2 months = $10,000 × 2 months= $20,000

Hence, premium on bonds investment amount for two months is $20,000.

Calculate the interest revenue on the bond investment.

InterestRevenue=(Cash receivedPremiumonbondinvestment – Interest revenue)=$1,800,000$20,000$1,200,000=$580,000

Hence, Interest revenue amount is $580,000.

Journal entry for interest accrued for B bonds as on 31st December 2016.

Date Account Title and Explanation

Debit

($)

Credit

($)

2016 Interest Receivable 800,000  
December 31
    Discount on Bonds Investment 7,500  
        Interest Revenue   807,500
    (To record the interest accrued for B bonds)    

Table (4)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $16,000,000×10%×612=$800,000

Hence, interest receivable amount is $800,000.

Calculate discount on bonds investment.

 Discount on bonds investment per month=Total bondinvestmentdiscount Number of discount in months=$300,000240 months(20years)=$1,250

Discount on bonds investment for 6 months = $1,250 × 6 months= $7,500

Hence, discount on bond investment amount is $7,500.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable + Discount on bond investment= $800,000 +$7,500=$807,500

Hence, interest revenue amount is $807,500.

Journal entry for interest accrued for F bonds as on 31st December 2016.

Date Account Title and Explanation

Debit

($)

Credit

($)

2016 Interest Receivable 300,000  
December 31
           Premium on Bonds Investment   10,000
        Interest Revenue   290,000
    (To record the interest accrued for F bonds)    

Table (5)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $30,000,000×12%×112=$300,000

Hence, interest receivable amount is $300,000.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable – Premium on bond investment= $300,000 –$10,000=$290,000

Hence, interest revenue amount is $290,000.

Explanation:

Journal entry for interest received on B bonds as on 1st January 2017.

Date Account Title and Explanation Debit ($) Credit ($)
2017 Cash 800,000
January 1
Interest Receivable 800,000
        (To record interest received on B bonds)    

Table (6)

Working note:

Calculate the amount of interest received (cash received).

Interest(cash )received = $16,000,000×10%×612=$800,000

Hence, cash received amount is $800,000.

Journal entry for interest received on F bonds as on 1st June 2017.

Date Account Title and Explanation Debit ($) Credit ($)
2017 Cash 1,800,000
June 1
Premium on Bonds Investment 50,000
Interest Receivable 3,000,000
  Interest Revenue   1,450,000
        (To record interest received on F bonds)    

Table (7)

Working notes:

Calculate the amount of cash received.

Cash received = $30,000,000 × 6%= $1,800,000

Hence, cash received amount is $1,800,000.

Calculate premium on bonds investment.

Premium on bonds investment for 5 months = $10,000 × 5 months= $50,000

Hence, premium on bonds investment amount is $50,000.

Calculate the interest revenue on the bond investment.

InterestRevenue=(Cash receivedPremiumonbondinvestment – Interest revenue)=$1,800,000$50,000$300,000=$1,450,000

Hence, interest revenue amount is $1,450,000.

Journal entry for interest received on B bonds as on 1st July 2017.

Date Account Title and Explanation

Debit

($)

Credit

($)

2017 Cash 800,000  
July 1
    Discount on Bonds Investment 7,500  
        Interest Revenue   807,500
    (To record the interest accrued for B bonds)    

Table (8)

Journal entry for interest accrued for F bonds as on 1st September 2017.

Date Account Title and Explanation

Debit

($)

Credit

($)

2017 Interest Receivable 450,000  
September 1
           Premium on Bonds Investment   15,000
        Interest Revenue   435,000
    (To record the interest accrued for F bonds)    

Table (9)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $15,000,000×12%×312=$450,000

Hence, interest receivable amount is $450,000.

Calculate premium on bonds investment.

Premium on bonds investment  = $10,000 ×3months ×1530 = $15,000

Hence, premium on bonds investment amount is $15,000.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable – Premium on bond investment= $450,000 –$15,000=$435,000

Hence, interest revenue amount is $435,000.

Journal entry for sale of F bonds as on 1st September 2017.

Date Account Title and Explanation Debit ($) Credit ($)
2017 Cash 15,600,000
September 1
  Loss on Sale of Investment 375,000
Premium on Bonds Investment 525,000
Bond Investment 15,000,000
  Interest Receivable   450,000
        (To record sale of F bonds)    

Table (10)

Working notes:

Calculate the amount of cash received.

Cash received = ($15,000,000×101% )+$450,000= $15,600,000

Hence, cash received amount is $15,600,000.

Calculate premium on bonds investment.

Premium on bonds investment  = [($1,160,000 –$20,000 –$10,000–$50,000)×1530]$15,000=$525,000

Hence, premium on bonds investment amount is $525,000.

Calculate loss on sale of investment.

Loss on sale of investment = (Bond investment + Premium on bond investment + Interets receivable – Cash received)=$15,000,000+$525,000+$450,000$15,600,000=$375,000

Hence, loss on sale of investment amount is $375,000.

Journal entry for interest received on F bonds as on 1st December 2017.

Date Account Title and Explanation Debit ($) Credit ($)
2017 Cash 900,000
December 1
Premium on Bonds Investment 30,000
  Interest Revenue   870,000
        (To record interest received on F bonds)    

Table (11)

Working notes:

Calculate the amount of cash received.

Cash received = $15,000,000 × 6%= $900,000

Hence, cash received amount is $900,000.

Calculate premium on bonds investment.

Premium on bonds investment  = $10,000× 6 months×1530= $30,000

Hence, premium on bonds investment amount is $30,000.

Calculate the interest revenue on the bond investment.

InterestRevenue=Cash receivedPremiumonbondinvestment=$900,000$30,000=$870,000

Hence, interest revenue amount is $870,000.

Journal entry for interest accrued for B bonds as on 31st December 2017.

Date Account Title and Explanation

Debit

($)

Credit

($)

2017 Interest Receivable 800,000  
December 31
    Discount on Bonds Investment 7,500  
        Interest Revenue   807,500
    (To record the interest accrued for B bonds)    

Table (12)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $16,000,000×10%×612=$800,000

Hence, interest receivable amount is $800,000.

Calculate discount on bonds investment.

Discount on bonds investment for 6 months = $1,250 × 6 months= $7,500

Hence, discount on bonds investment amount is $7,500.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable + Discount on bond investment= $800,000 +$7,500=$807,500

Hence, interest revenue amount is $807,500.

Journal entry for interest accrued for F bonds as on 31st December 2017.

Date Account Title and Explanation

Debit

($)

Credit

($)

2017 Interest Receivable 150,000  
December 31
           Premium on Bonds Investment   5,000
        Interest Revenue   145,000
    (To record the interest accrued for F bonds)    

Table (13)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $15,000,000×12%×112=$150,000

Hence, interest receivable amount is $150,000.

Calculate premium on bonds investment.

Premium on bonds investment  = $10,000× 1 month×1530= $5,000

Hence, premium on bonds investment amount is $5,000.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable – Premium on bond investment= $150,000 –$5,000=$145,000

Hence, interest revenue amount is $145,000.

J ournal entry for interest received on B bonds as on 1st January 2018.

Date Account Title and Explanation Debit ($) Credit ($)
2018 Cash 800,000
January 1
Interest Receivable 800,000
        (To record interest received on B bonds)    

Table (14)

Working note:

Calculate the amount of interest received (cash received).

Interest(cash )received = $16,000,000×10%×612=$800,000

Hence, cash received amount is $800,000.

Journal entry for interest accrued for F bonds as on 28th February 2018.

Date Account Title and Explanation

Debit

($)

Credit

($)

2018 Interest Receivable 300,000  
February 28
           Premium on Bonds Investment   10,000
        Interest Revenue   290,000
    (To record the interest accrued for F bonds)    

Table (14)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $15,000,000×12%×212=$300,000

Hence, interest receivable amount is $300,000.

Calculate premium on bonds investment.

Premium on bonds investment  = $10,000 ×2months ×1530 = $10,000

Hence, premium on bonds investment amount is $10,000.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable – Premium on bond investment= $300,000 –$10,000=$290,000

Hence, interest revenue amount is $290,000.

Journal entry for sale of F bonds as on 28th February 2018.

Date Account Title and Explanation Debit ($) Credit ($)
2018 Cash 15,750,000
February 28
  Loss on Sale of Investment 195,000
Premium on Bonds Investment 495,000
Bond Investment 15,000,000
  Interest Receivable   450,000
        (To record sale of F bonds)    

Table (15)

Working notes:

Calculate the amount of cash received.

Cash received = ($15,000,000×102% )+$450,000= $15,750,000

Hence, cash received amount is $15,750,000.

Calculate premium on bonds investment.

Premium on bonds investment  = ($1,160,000 –$20,000 –$10,000–$50,000$15,000$525,000$30,000$5,000$10,000)=$495,000

Hence, premium on bonds investment amount is $495,000.

Calculate loss on sale of investment.

Loss on sale of investment = (Bond investment + Premium on bond investment + Interets receivable – Cash received)=$15,000,000+$495,000+$450,000$15,750,000=$195,000

Hence, loss on sale of investment amount is $195,000.

Journal entry for interest accrued for B bonds as on 31st December 2018.

Date Account Title and Explanation

Debit

($)

Credit

($)

2018 Interest Receivable 800,000  
December 31
    Discount on Bonds Investment 7,500  
        Interest Revenue   807,500
    (To record the interest accrued for B bonds)    

Table (16)

Working notes:

Calculate the amount of interest receivable.

Interest receivable = $16,000,000×10%×612=$800,000

Hence, interest receivable amount is $800,000.

Calculate discount on bonds investment.

Discount on bonds investment for 6 months = $1,250 × 6 months= $7,500

Hence, discount on bonds investment amount is $7,500.

Calculate the amount of interest revenue.

Interest revenue = Interest receivable + Discount on bond investment= $800,000 +$7,500=$807,500

Hence, interest revenue amount is $807,500.

(2)

To determine

To Calculate: The earnings increase in each of the three years for L as a result of long-term bond investment.

(2)

Expert Solution
Check Mark

Explanation of Solution

Calculate earnings in 2016.

Earnings in 2016 = (Interest revenue on December 1, 2016 + Interest revenue on December 31, 2016)= $580,000 +($807,500+$290,000)=$1,677,500

Therefore, earnings amount as on 2016 is $1,677,500.

Calculate earnings in 2017.

Earnings in 2017 = (Interest revenue on June 1, 2017 +Interest revenue on July 1, 2017Interest revenue on September 1, 2017 + Interest revenue on December 1, 2016 + Interest revenue on December 31, 2016 Loss on sale of investment)

Earnings in 2017= ($1,450,000 +$807,500 +$435,000 +$870,000 +($807,500+$145,000)$(375,000))=$4,140,000

Therefore, earnings amount as on 2017 is $4,140,000.

Calculate earnings in 2018.

Earnings in 2018 = (Interest revenue on February 28, 2018 + Interest revenue on December 31, 2018Lossonsale ofinvestment)= $290,000 +$807,500+$(195,000)=$902,500

Therefore, earnings amount as on 2018 is$902,500

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Chapter 14 Solutions

INTERMEDIATE ACCOUNTING

Ch. 14 - When a notes stated rate of interest is...Ch. 14 - How does an installment note differ from a note...Ch. 14 - Prob. 14.13QCh. 14 - Prob. 14.14QCh. 14 - Air Supply issued 6 million of 9%, 10-year...Ch. 14 - Both convertible bonds and bonds issued with...Ch. 14 - Prob. 14.17QCh. 14 - Cordova Tools has bonds outstanding during a year...Ch. 14 - If a company prepares its financial statements...Ch. 14 - (Based on Appendix 14A) Why will bonds always sell...Ch. 14 - Prob. 14.21QCh. 14 - Prob. 14.22QCh. 14 - Prob. 14.23QCh. 14 - Bank loan; accrued interest LO132 On October 1,...Ch. 14 - Non-interest-bearing note; accrued interest LO132...Ch. 14 - Determining the price of bonds LO142 A company...Ch. 14 - Determining the price of bonds LO142 A company...Ch. 14 - Effective interest on bonds LO142 On January 1, a...Ch. 14 - Effective interest on bonds LO142 On January 1, a...Ch. 14 - Straight-line interest on bonds LO142 On January...Ch. 14 - Investment in bonds LO142 On January 1, a company...Ch. 14 - Prob. 14.9BECh. 14 - Note with unrealistic interest rate LO143 On...Ch. 14 - Installment note LO143 On January 1, a company...Ch. 14 - Prob. 14.12BECh. 14 - Bonds with detachable warrants LO145 Hoffman...Ch. 14 - Convertible bonds LO145 Hoffman Corporation...Ch. 14 - Prob. 14.15BECh. 14 - Prob. 14.1ECh. 14 - Prob. 14.2ECh. 14 - Prob. 14.3ECh. 14 - Prob. 14.4ECh. 14 - Prob. 14.5ECh. 14 - E 14–6 Bonds; issuance; effective...Ch. 14 - Prob. 14.7ECh. 14 - Prob. 14.8ECh. 14 - Prob. 14.9ECh. 14 - Prob. 14.10ECh. 14 - Prob. 14.11ECh. 14 - Prob. 14.12ECh. 14 - Prob. 14.13ECh. 14 - Prob. 14.14ECh. 14 - Prob. 14.15ECh. 14 - Prob. 14.16ECh. 14 - Prob. 14.17ECh. 14 - Prob. 14.18ECh. 14 - Prob. 14.19ECh. 14 - Prob. 14.20ECh. 14 - Prob. 14.21ECh. 14 - Prob. 14.22ECh. 14 - Prob. 14.23ECh. 14 - Prob. 14.24ECh. 14 - Prob. 14.25ECh. 14 - Prob. 14.26ECh. 14 - Prob. 14.27ECh. 14 - Prob. 14.28ECh. 14 - Prob. 14.29ECh. 14 - Prob. 14.30ECh. 14 - Prob. 14.31ECh. 14 - Prob. 14.32ECh. 14 - Prob. 14.33ECh. 14 - Prob. 14.34ECh. 14 - Prob. 14.35ECh. 14 - Prob. 14.36ECh. 14 - Prob. 1CPACh. 14 - Prob. 2CPACh. 14 - Prob. 3CPACh. 14 - Prob. 4CPACh. 14 - Prob. 5CPACh. 14 - Prob. 6CPACh. 14 - Prob. 7CPACh. 14 - Prob. 8CPACh. 14 - Prob. 9CPACh. 14 - Prob. 10CPACh. 14 - 11. On May 1, 2016, Maine Co. issued 10-year...Ch. 14 - Prob. 12CPACh. 14 - Prob. 1CMACh. 14 - Prob. 2CMACh. 14 - Prob. 3CMACh. 14 - Prob. 14.1PCh. 14 - Prob. 14.2PCh. 14 - Prob. 14.3PCh. 14 - Prob. 14.4PCh. 14 - Prob. 14.5PCh. 14 - Prob. 14.6PCh. 14 - Prob. 14.7PCh. 14 - Prob. 14.8PCh. 14 - Prob. 14.9PCh. 14 - Prob. 14.10PCh. 14 - Prob. 14.11PCh. 14 - Prob. 14.12PCh. 14 - Prob. 14.13PCh. 14 - Prob. 14.14PCh. 14 - Prob. 14.15PCh. 14 - Prob. 14.16PCh. 14 - Prob. 14.17PCh. 14 - Prob. 14.18PCh. 14 - Prob. 14.19PCh. 14 - Prob. 14.21PCh. 14 - Prob. 14.22PCh. 14 - Prob. 14.23PCh. 14 - Prob. 14.24PCh. 14 - Prob. 14.25PCh. 14 - Prob. 14.26PCh. 14 - Prob. 14.1BYPCh. 14 - Real World Case 142 Zero-coupon debt; HP Inc. ...Ch. 14 - Prob. 14.4BYPCh. 14 - Prob. 14.5BYPCh. 14 - Prob. 14.6BYPCh. 14 - Prob. 14.8BYPCh. 14 - Prob. 14.9BYPCh. 14 - Prob. 14.10BYPCh. 14 - Analysis Case 14–11 Bonds; conversion;...
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