Chapter 14, Problem 6E

a.

To determine

Prepare the journal entry to record issuance of bonds payable at discount on December 31, 2019.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

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.

Prepare journal entry for issuance of bonds payable on December 31, 2019:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2019	Cash		188,000
	Discount on Bonds Payable		12,000
	Bonds Payable			200,000
	(To record issuance of bonds payable at discount)

Table (1)

To record issuance of bonds payable at discount:

• Cash is an asset and it is increased. So, debit it by $188,000.
• Discount on Bonds Payable is a contra liability account and it is increased. So, debit it by $12,000.
• Bonds payable is a liability and it is increased. So, credit it by $200,000.

b.

To determine

Prepare the journal entry to record semi-annual interest and amortization of discount on bonds.

Explanation of Solution

Prepare journal entry for payment of semi-annual interest and amortization of discount on bonds:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
June 30, 2020	Bond Interest Expense (3)		8,000
	Discount on Bonds Payable  (1)			3,000
	Cash (2)			5,000
	(To record semi-annual payment of interest and amortization of discount on bonds)

Table (2)

To record semi-annual payment of interest and amortization of discount on bonds:

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is a contra liability account and it is decreased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000.

Working notes:

Calculate discount on bonds payable semi-annually:

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 31/12/2019}\\ -\text{Unamortized discount on 30/06/2020}\end{array}\right)\\ =\$12,000-\$9,000\\ =\$3,000\end{array}$ (1)

Calculate the amount of cash interest as on June 30, 2020:

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (2)

Calculate the interest expense on the bond as on June 30, 2020:

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (3)

Prepare journal entry for payment of semi-annual interest and amortization of discount on bonds:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2020	Bond Interest Expense (6)		8,000
	Discount on Bonds Payable  (4)			3,000
	Cash (5)			5,000
	(To record semi-annual payment of interest and amortization of discount on bonds)

Table (3)

To record semi-annual payment of interest and amortization of discount on bonds:

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is a contra liability account and it is decreased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

Working notes:

Calculate discount on bonds payable semi-annually:

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 30/06/2020}\\ -\text{Unamortized discount on 31/12/2020}\end{array}\right)\\ =\$9,000-\$6,000\\ =\$3,000\end{array}$ (4)

Calculate the amount of cash interest as on December 31, 2020:

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (5)

Calculate the interest expense on the bond as on December 31, 2020:

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (6)

Prepare journal entry for payment of semi-annual interest and amortization of discount on bonds:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
June 30, 2021	Bond Interest Expense (9)		8,000
	Discount on Bonds Payable  (7)			3,000
	Cash (8)			5,000
	(To record semi-annual payment of interest and amortization of discount on bonds)

Table (4)

To record semi-annual payment of interest and amortization of discount on bonds:

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

Working notes:

Calculate discount on bonds payable semi-annually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 31/12/2020}\\ -\text{Unamortized discount on 30/06/2021}\end{array}\right)\\ =\$6,000-\$3,000\\ =\$3,000\end{array}$ (7)

Calculate the amount of cash interest as on June 30, 2021:

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (8)

Calculate the interest expense on the bond as on June 30, 2021:

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (9)

Prepare journal entry for payment of semi-annual interest and amortization of discount on bonds:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2021	Bond Interest Expense (12)		8,000
	Discount on Bonds Payable  (10)			3,000
	Cash (11)			5,000
	(To record semi-annual payment of interest and amortization of discount on bonds)

Table (5)

To record semi-annual payment of interest and amortization of discount on bonds:

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

Working notes:

Calculate discount on bonds payable semi-annually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 30/06/2021}\\ -\text{Unamortized discount on 31/12/2021}\end{array}\right)\\ =\$3,000-\$0\\ =\$3,000\end{array}$ (10)

Calculate the amount of cash interest as on December 31, 2021:

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (11)

Calculate the interest expense on the bond as on December 31, 2021:

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (12)

c.

To determine

Prepare the journal entry to record the payment of bond payable at maturity.

Explanation of Solution

Prepare journal entry for payment of bond payable at maturity:

Date	Accounts and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2021	Bonds Payable		200,000
	Cash			200,000
	(To record the payment of bond payable at maturity)

Table (6)

To record the payment of bond payable at maturity:

• Bonds payable is a liability and it is decreased. So, debit it by $200,000.
• Cash is an asset and it is decreased. So, credit it by $200,000.