Southwest Corporation issued bonds with the following details:  Face value: $700,000Interest: 10 percent per year payable each December 31Terms: 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. Required: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.

Question
Asked Apr 23, 2019

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.

 

Required:

  1. 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. 2. & 3. Prepare the journal entry to record the issuance of the bonds and the payment of interest on December 31, 2018 and 2019.

  3. 4-a. How much interest expense would be reported on the income statements for 2018 and 2019?

  4. 4-b. Compute the bond value which should be reported on the balance sheets at December 31, 2018 and 2019.

 

 

 

 

check_circleExpert Solution
Step 1
  1. Face value of the bond= $700,000

Bonds were issued at $103 (103% of par)

The Cash received on bond issue= $700,000*103%=$721,000

Step 2
  1. The interest on bonds would be paid at 10% on $700,000

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

Southwest Corporation

Journal Entries

Date

Accounts & Explanation

Debit $

Credit $

 

 

 

 

01/01/2018

Cash

720,000

 

 

       Bonds payable 10%

 

700,000

 

       Premium on issue of bond

 

21,000

 

(Bond issued at premium)

 

 

 

 

 

 

31/12/18

Interest expenses(70,000-4200)

65,800

 

 

Premium on issue of bond

4,200

 

 

      Cash

 

70,000.

Step 3
  1. The interest expenses to be reported in 2018 and 2019 would be $65,800. This is because we are amortizing the premium on issue of bonds annuall...

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