Southwest Corporation issued bonds with the following details:
|Face value: $700,000|
|Interest: 10 percent per year payable each December 31|
|Terms: Bonds dated January 1, 2018, due five years from that date|
The annual accounting period ends December 31. The bonds were issued at 103 on January 1, 2018, when the market interest rate was 9 percent. Assume the company uses straight-line amortization and adjusts for any rounding errors when recording interest expense in the final year.
1. Compute the cash received from the bond issuance in dollars. TIP: The issue price typically is quoted at a percentage of face value.
2. & 3. Prepare the journal entry to record the issuance of the bonds and the payment of interest on December 31, 2018 and 2019.
4-a. How much interest expense would be reported on the income statements for 2018 and 2019?
4-b. Compute the bond value which should be reported on the balance sheets at December 31, 2018 and 2019.
Bonds were issued at $103 (103% of par)
The Cash received on bond issue= $700,000*103%=$721,000
So, cash paid =$700,000*10%= $70,000
Again, the bonds were issued at a premium because the bonds interest rate is higher than the market interest rate
So, the premium on issue of bonds will need to be amortized and set off against the interest expenses to reduce the impact of higher interest payment
Now, the premium on issue of debentures= $721,000-$700,000= $21,000
this premium needs to be amortized for 5 years, so annual amortization would be $21,000/5=$4,200
Journal entries for issue and payment of interest can be shown below
Accounts & Explanation
Bonds payable 10%
Premium on issue of bond
(Bond issued at premium)
Premium on issue of bond
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