Chapter 10, Problem 10.8AP

(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.

To Prepare: The journal entry to record the issuance of bonds of Corporation F on January 1, 2017.

Answer to Problem 10.8AP

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

Date	Account title and Explanation	Debit	Credit
January 1, 2017	Cash (1)	$2,040,000
	Premium on bonds payable (2)		$40,000
	Bonds payable		$2,000,000
	(To record the issuance of bonds payable at premium value  for Corporation F )

Table (1)

Working notes:

Calculate Cash received from issuance of bonds payable of Corporation F as shown below:

  $\begin{array}{c}\text{Cash received =}\text{Face value of bonds }\times \text{1}\text{.02}\\ \text{=}\text{\$2,000,000}\times \text{1}\text{.02}\\ \text{=}\text{\$2,040,000}\end{array}$ (1)

Calculate premium on bonds payable of Corporation F as shown below:

  $\begin{array}{c}\text{Premium on bonds payable}=\text{ Cash received}\text{– Face value of bonds}\\ =2,040,000\text{ –}\$2,000,000\\ =\$40,000\end{array}$ (2)

Explanation of Solution

• Cash is a current asset, and increased. Therefore, debit cash account for $2,040,000.
• Premium on bonds payable is a contra liability, and increased. Therefore, credit premium on bonds payable for $40,000.
• Bonds payable is a long-term liability, and increased. Therefore, credit bonds payable account for $2,000,000.

To determine

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

Answer to Problem 10.8AP

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

Date	Account title and Explanation	Debit	Credit
December 31, 2017	Interest expense (3)	$132,000
	Premium on bonds payable (1)	$8,000
	Interest payable (2)		$140,000
	(To record the accrued interest expense and premium on amortize bond for Corporation F)

Table (2)

Working notes:

Calculate premium of bonds payable for Corporation F as shown below:

  $\begin{array}{c}\text{Premium on bonds payable = }\frac{\text{Premium on bonds payable}}{\text{Number of years for Premium }}\\ =\frac{\$40,000}{5\text{Years}}\\ =\$8,000\end{array}$ (1)

Calculate interest payable amount of Corporation F as shown below:

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

Calculate interest expense of Corporation F as shown below:

  $\begin{array}{c}\text{Interest}\text{Expense}=\text{Interest payable }-\text{Premium on bonds payable}\\ =\$140,000-\$8,000\\ =\$132,000\end{array}$ (3)

Explanation of Solution

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $132,000.
• Premium on bonds payable is a contra liability, and decreased. Therefore, debit premium on bonds payable for $8,000.
• Interest payable is a
• current liability, and increased. Therefore, credit interest payable account for $140,000.

(b)

To determine

To Prepare: The journal entry to record the issuance of bonds of Corporation F on January 1, 2017.

Answer to Problem 10.8AP

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

Date	Account title and Explanation	Debit	Credit
January 1, 2017	Cash (1)	$1,940,000
	Discount on bonds payable (2)	$60,000
	Bonds payable		$2,000,000
	(To record the issuance of bonds payable at discount value  for Corporation F )

Table (3)

Working notes:

Calculate Cash received from issuance of bonds payable of Corporation F as shown below:

  $\begin{array}{c}\text{Cash received =}\text{Face value of bonds }\times 0.97\\ \text{=}\text{\$2,000,000}\times 0.97\\ \text{=}\text{\$1,940,000}\end{array}$ (1)

Calculate discount on bonds payable of Corporation F as shown below:

  $\begin{array}{c}\text{Discount on bonds payable}=\text{ Face value of bonds}\text{– Cash received}\\ =2,000,000\text{ –}\$1,940,000\\ =\$60,000\end{array}$ (2)

Explanation of Solution

• Cash is a current asset, and increased. Therefore, debit cash account for $1,940,000.
• Discount on bonds payable is a contra liability, and decreased. Therefore, debit discount on bonds payable for $60,000.
• Bonds payable is a long-term liability, and increased. Therefore, credit bonds payable account for $2,000,000.

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 10.8AP

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 (3)	$152,000
	Discount on bonds payable (1)		$12,000
	Interest payable (2)		$140,000
	(To record the accrued interest expense and discount on amortize bond for Corporation F)

Table (4)

Working notes:

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

  $\begin{array}{c}\text{Discount on bonds payable = }\frac{\text{Discount on bonds payable}}{\text{Number of years for discount }}\\ =\frac{\$60,000}{5\text{Years}}\\ =\$12,000\end{array}$ (1)

Calculate interest payable amount of Company O as shown below:

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

Calculate interest expense of Company O as shown below:

  $\begin{array}{c}\text{Interest}\text{Expense}=\text{Interest payable}\text{+}\text{Discount on bonds payable}\\ =\$140,000+\$12,000\\ =\$152,000\end{array}$ (3)

Explanation of Solution

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $152,000.
• Discount on bonds payable is a contra liability, and increased. Therefore, credit discount on bonds payable for $12,000.
• Interest payable is a current liability, and increased. Therefore, credit interest payable account for $152,000.

(c-1)

To determine

To Prepare: The balance sheet presentation for issuance of bonds at December 31, 2017 using the selling price of $102.

Answer to Problem 10.8AP

Prepare the balance sheet presentation for issuance of bonds at December 31, 2017 using the selling price of $102 as shown below:

Figure (1)

Explanation of Solution

Premium on bonds payable for the year 2017 is $32,000 which is calculated by deducting from premium on amortize of bond for the year 2017 is $8,000 from premium on bonds payable  on January 1, 2017 is $40,000.

(c-2)

To determine

To Prepare: The balance sheet presentation for issuance of bonds at December 31, 2017 using the selling price of $97.

Answer to Problem 10.8AP

Prepare the balance sheet presentation for issuance of bonds at December 31, 2017 using the selling price of $97 as shown below:

Figure (2)

Explanation of Solution

Discount on bonds payable for the year 2017 is $48,000 which is calculated by deducting from discount on amortization of bond for the year 2017 for $12,000, from discount on bonds payable on January 1, 2017 for $60,000.