Chapter 10, Problem 10.11AP

(a-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.

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.

Effective interest rate of amortization bond

Effective interest rate method of amortization is a process of amortizing premium on bond or discount on bond, which allocates the different amount of interest expense in each period of interest payment, but a constant percentage rate.

To Prepare: The journal entry to record the issuance of bonds of Company O on January 1,

2017.

Answer to Problem 10.11AP

Prepare the journal entry to record the issuance of bonds of Company O on January 1, 2017as shown below:

Date	Account title and Explanation	Debit	Credit
January 1, 2017	Cash	$2,147,202
	Premium on bonds payable (1)		$147,202
	Bonds payable		$2,000,000
	(To record the issuance of bonds payable at premium value  for Company O )

Table (1)

Working note:

Calculate premium on bonds payable of Company O is shown below:

$\begin{array}{c}\text{Premium on bonds payable}=\text{ Cash received}\text{– Face value of bonds}\\ =2,147,202\text{ –}\$2,000,000\\ =\$147,202\end{array}$ (1)

Explanation of Solution

• Cash is a current asset, and increased. Therefore, debit cash account for $2,147,202.
• Premium on bonds payable is a contra liability, and increased. Therefore, credit premium on bonds payable for $147,202.
• Bonds payable is a long-term liability, and increased. Therefore, credit bonds payable account for $2,000,000.

(a-2)

To determine

To Prepare: The journal entry to record the accrued interest expense and premium on amortize bond for Company O on December 31, 2017.

Answer to Problem 10.11AP

Prepare the journal entry to record the accrued interest expense and premium on amortize bond for Company O on December 31, 2017 as shown below:

Date	Account title and Explanation	Debit	Credit
December 31, 2017	Interest expense (2)	$128,832
	Premium on bonds payable (3)	$11,168
	Interest payable (1)		$140,000
	(To record the accrued interest expense and premium on amortize bond for Company O)

Table (2)

Working notes:

Calculate interest payable amount of Company O is shown below:

  $\begin{array}{c}\text{Interest payable}=\text{Face value}\times \text{Face interest rate}\times \text{Interest time period}\\ =\$2,0000,000\times 7\%\times 1\\ =\$140,000\end{array}$ (1)

Calculate interest expense of Company O is shown below:

  $\begin{array}{c}\text{Interest}\text{Expense}=\text{Carrying value of bonds ×}6\text{\%}\\ =\$2,147,202\times 6\%\\ =\$128,832\end{array}$ (2)

Calculate premium of bonds payable for Company O is shown below:

  $\begin{array}{c}\text{Premium on bonds payable = Interest payable }-\text{Interest expense}\\ \text{=}\text{\$140,000 }-\$128,832\\ =\$11,168\end{array}$ (3)

Explanation of Solution

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $128,832.
• Premium on bonds payable is a contra liability, and decreased. Therefore, debit premium on bonds payable for $11,168.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $140,000.

(a-3)

To determine

To Prepare:  The journal entry to record the payment of interest of Company O on January 1, 2018.

Answer to Problem 10.11AP

Prepare the journal entry to record the payment of interest of Company O on January 1, 2018 as shown below:

Date	Account title and Explanation	Debit	Credit
January 1, 2018	Interest payable	$140,000
	Cash		$140,000
	(To record the payment of interest expenses for Company O)

Table (3)

Explanation of Solution

• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $140,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $140,000.

(a-4)

To determine

To Prepare: The journal entry to record the accrued interest expense and discount on amortize bond for Corporation L on December 31, 2018.

Answer to Problem 10.11AP

Prepare the journal entry to record the accrued interest expense and discount on amortize bond for Company O on December 31, 2018 as shown below:

Date	Account title and Explanation	Debit	Credit
December 31, 2018	Interest expense (2)	$128,162
	Premium on bonds payable (3)	$11,838
	Interest payable (1)		$140,000
	(To record the accrued interest expense and premium on amortize bond for Company O)

Table (4)

Working notes:

Calculate interest payable amount of Company O as shown below:

  $\begin{array}{c}\text{Interest payable}=\text{Face value}\times \text{Face interest rate}\times \text{Interest time period}\\ =\$2,0000,000\times 7\%\times 1\\ =\$140,000\end{array}$ (1)

Calculate interest expense of Company O as shown below:

  $\begin{array}{c}\text{Interest}\text{Expense}=\text{Carrying value of bonds on 31st January 2017×}6\text{\%}\\ =(\$2,147,202-\$11,168)\times 6\%\\ =\$128,162\end{array}$ (2)

Calculate premium of bonds payable for Company O as shown below:

  $\begin{array}{c}\text{Premium on bonds payable = Interest payable }-\text{Interest expense}\\ \text{=}\text{\$140,000 }-\$128,162\\ =\$11,838\end{array}$ (3)

Explanation of Solution

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $128,162.
• Premium on bonds payable is a contra liability, and decreased. Therefore, debit premium on bonds payable for $11,838.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $140,000.

(b)

To determine

To Prepare: The proper long-term liabilities section balance sheet presentation for the liability of bonds payable on 31^st December 2018 of Company O.

Answer to Problem 10.11AP

Prepare the proper long-term liabilities section balance sheet presentation for the liability of bonds payable on 31^st December 2018 of Company O as shown below:

Figure (1)

Explanation of Solution

Premium on bonds payable for the year 2018 is $124,196 which is calculated by deducting from premium on amortize of bond for the year 2017 ($11,168) and 2018 ($11,838) from premium on bonds payable on January 1, 2017 is $147,202.

(c-1)

To determine

To Prepare: The interest expenses amount shows in the year 2018 of Company O.

Answer to Problem 10.11AP

Prepare the interest expenses amount shows in the year 2018 of Company O as shown below:

  $\begin{array}{c}\text{Interest}\text{Expense}=\text{Carrying value of bonds on 31st January 2017×}\text{Interest rate}\\ =(\$2,147,202-\$11,168)\times 6\%\\ =\$128,162\end{array}$

Therefore, an Interest expense amount show in the year 2018 of Company O is $128,162.

Explanation of Solution

Interest expense is calculated by multiplying carrying value of bonds on January 31, 2017 with interest rate. Therefore, an Interest expense amount show in the year 2018 of Company O is $128,162.

(c-2)

To determine

To Ascertain: If the bond interest expense reported in the year 2018 is greater than the amount reported, lesser than the amount reported or same amount reported, if the Company used the straight-line method of amortization.

Explanation of Solution

The interest expense under straight-line method of amortization is $125,280$\left[\$140,000–\left(\$147,202÷10\right)\right]$ lesser than the interest expense under effective interest method of amortization is $128,162. Hence, bond interest expense (under effective interest method) reported in 2018 would be greater than the straight-line method.