Chapter 10, Problem 10.7AP

(a)

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.

Redemption of Bonds

The process of repaying the sale amount of bonds to bondholders at the time of maturity or before the maturity period is called as redemption of bonds. It is otherwise called as retirement of bonds.

To Prepare: The journal entry to record payment of interest expenses for Corporation L on January 1, 2017.

Answer to Problem 10.7AP

Prepare the journal entry to record payment of interest expenses for Corporation L on January 1, 2017 as shown below:

Date	Account title and Explanation	Debit	Credit
January 1, 2017	Interest payable	$96,000
	Cash		$96,000
	(To record the payment of interest expense for Corporation L )

Table (1)

Explanation of Solution

• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $96,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $96,000.

(b)

To determine

To Prepare: The journal entry to record the accrued interest expense and discount on amortize bond for Corporation L on December 31, 2017.

Answer to Problem 10.7AP

Prepare the journal entry to record the accrued interest expense and discount on amortize bond for Corporation L on December 31, 2017 as shown below:

Date	Account title and Explanation	Debit	Credit
December 31, 2017	Interest expense (3)	$98,400
	Discount on bonds payable (1)		$2,400
	Interest payable (2)		$96,000
	(To record the accrued interest expense and discount on amortize bond for Corporation L)

Table (2)

Working notes:

Calculate Discount on bonds payable is shown below:

$\begin{array}{c}\text{Discount on bonds payable =}\frac{\text{Discount on bonds payable}}{\text{Number of periods on discount}}\\ =\frac{\$24,000}{10}\\ =\$2,400\end{array}$ (1)

Calculate interest payable of Corporation L is shown below:

$\begin{array}{c}\text{Interest payable =}\text{Face value of bonds }\times \text{interest rate }\times \text{Time period}\\ \text{=}\text{\$2,400,000}\times \text{4\%}\times \text{1}\\ =\$96,000\end{array}$ (2)

Calculate an interest expense of Corporation L is shown below:

$\begin{array}{c}\text{Interest expense}\text{=}\text{Interest payable +}\text{Discount on bonds payable}\\ \text{=}\text{\$96,000}\text{+\$2,400}\\ \text{=}\text{\$98,400}\end{array}$ (3)

Explanation of Solution

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $98,400.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable for $2,400.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $96,000.

(c)

To determine

To Prepare: The journal entry to record the redemption on bonds for Corporation L on January 1, 2018.

Answer to Problem 10.7AP

Prepare the journal entry to record the redemption on bonds for Corporation L on January 1, 2018 as shown below:

Date	Account title and Explanation	Debit	Credit
January 1, 2018	Bonds payable	$400,000
	Loss on redemption of bonds (3)	$11,600
	Discount on bonds payable (2)		$3,600
	Cash (1)		$408,000
	(To record the redemption of bonds for Corporation L at call price is  $102)

Table (3)

Working notes:

Calculate cash amount paid for redemption of bonds of Corporation L is shown below:

$\begin{array}{c}\text{Cash paid = Face value of bonds }\times \text{1}\text{.02}\\ \text{= \$400,000}\times \text{1}\text{.02}\\ \text{=}\text{\$408,000}\end{array}$ (1)

Calculate the discount on bonds payable for redemption of bonds of Corporation L is shown below:

$\begin{array}{c}\text{Discount on bonds payable =}\text{Remaining discount }\times \frac{\$400,000}{\$2,400,000}\\ =(\$24,000-\$2,400)\times \frac{1}{6}\\ =\$3,600\end{array}$ (2)

Calculate the Loss on redemption of bonds of Corporation L is shown below:

$\begin{array}{c}\text{Loss on redemption of bonds = Cash paid + discount on notes payable }-\text{Bonds payable}\\ \text{=}\text{\$408,000}\text{+}\text{\$3,600}-\$800,000\\ =\$11,600\end{array}$ (3)

Explanation of Solution

• Bonds payable is a long-term liability, and decreased. Therefore, debit bonds payable account for $400,000.
• Loss on redemption of bonds is a component of stockholders’ equity, and decreased. Therefore, debit loss on redemption of bonds account for $11,600.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable account for $3,600.
• Cash is a current asset, and decreased. Therefore, credit cash account for $408,000.

(d)

To determine

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

Answer to Problem 10.7AP

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

Date	Account title and Explanation	Debit	Credit
December 31, 2018	Interest expense (3)	$82,000
	Discount on bonds payable (1)		$2,000
	Interest payable (2)		$80,000
	(To record the accrued interest expense and discount on amortize bond for Corporation L)

Table (3)

Working notes:

Calculate remaining discount on bonds payable is shown below:

$\begin{array}{c}\text{Discount on bonds payable =}\text{Remaining discount }\times \frac{\$2,000,000}{\$2,400,000}\\ =(\$24,000-\$2,400)\times \frac{5}{6}\\ =\$18,000\end{array}$

$\begin{array}{c}\text{Discount on bonds payable =}\frac{\text{Remaining bond discount}}{\text{Number of period on discount}}\\ =\frac{\$18,000}{9}\\ =\$2,000\end{array}$ (1)

Calculate interest payable of Corporation L is shown below:

$\begin{array}{c}\text{Interest payable =}\text{Face value of bonds }\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$2,000,000}\times \text{ 4\%}\times \text{1}\\ \text{= \$80,000}\end{array}$ (2)

Calculate an interest expense of Corporation L is shown below:

$\begin{array}{c}\text{Interest expense}\text{=}\text{Interest payable +}\text{Discount on bonds payable}\\ \text{=}\text{\$80,000}\text{+\$2,000}\\ \text{= \$82,000}\end{array}$ (3)

Explanation of Solution

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $98,400.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable for $2,400.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $96,000.