Chapter 10, Problem 17BE

(a)

To determine

Prepare journal entry for the issuance of bonds.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a high price than the face value.

Prepare journal entry for cash proceeds from the issuance of the bonds.

Date		Account Title and Explanation			Debit ($)	Credit ($)
		Cash			430,887
			Premium on Bonds Payable (1)			30,887
			Bonds Payable			400,000
				(To record issue of bonds at premium)

Table (1)

• Cash is an asset and it is increased. So, debit it by $430,887.
• Premium on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $30,887.
• Bonds payable is a liability and it is increased. So, credit it by $400,000.

Working note:

Calculate premium on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable = }\left(\begin{array}{l}\text{Cash received }\\ -\text{Face value }\end{array}\right)\\ =\$400,000-\$430,887\\ =\$30,887\end{array}$ (1)

(b)

To determine

To prepare: Journal entry to record first semiannual interest payment and amortization of bond premium on June 30, 2015.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a high price than the face value.

Straight-line amortization method: It is a method of bond amortization that spreads the amount of the bond discount equally over the interest period.

Prepare journal entry for first semiannual interest payment and amortization of discount on bonds.

Date		Account Title and Explanation			Debit ($)	Credit ($)
2015		Interest Expense (4)			20,911
June	30	Premium on Bonds Payable  (2)			3,089
			Cash (3)			24,000
				(To record first semiannual payment of interest on bonds)

Table (2)

• Interest expense is an expense and it decreases the equity value. So, debit it by $20,911.
• Premium on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $3,089.
• Cash is an asset and it is decreased. So, credit it by $24,000.

Working notes:

Calculate premium on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\frac{\text{Premium on bonds payable per year}}{\text{Number}\text{of}\text{semiannual}\text{periods}}\right)\\ =\frac{\$30,887}{10}\\ =\$3,089\end{array}$ (2)

Calculate the amount of cash interest.

$\begin{array}{c}\text{ Cash interest = }\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\times \\ \text{Interest}\text{time}\text{period}\end{array}\right)\\ =\$400,000\times 12\%\times \frac{6}{12}\\ =\$24,000\end{array}$ (3)

Calculate the interest expense on the bond.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest }-\text{ Premium}onBondsPayable\\ =\$24,000(3)-\$3,089(2)\\ =\$20,911\end{array}$ (4)

(c)

To determine

To prepare: Journal entry to record second interest payment and amortization of bond discount on December 31, 2015.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a high price than the face value.

Straight-line amortization method: It is a method of bond amortization that spreads the amount of the bond discount equally over the interest period.

Prepare journal entry for second semiannual interest payment and amortization of discount on bonds.

Date		Account Title and Explanation			Debit ($)	Credit ($)
2015		Interest Expense (7)			20,911
December	31	Premium on Bonds Payable  (5)			3,089
			Cash (6)			24,000
				(To record first semiannual payment of interest on bonds)

Table (2)

• Interest expense is an expense and it decreases the equity value. So, debit it by $20,911.
• Premium on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $3,089.
• Cash is an asset and it is decreased. So, credit it by $24,000.

Working notes:

Calculate premium on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\frac{\text{Premium on bonds payable per year}}{\text{Number}\text{of}\text{semiannual}\text{periods}}\right)\\ =\frac{\$30,887}{10}\\ =\$3,089\end{array}$ (5)

Calculate the amount of cash interest.

$\begin{array}{c}\text{ Cash interest = }\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\times \\ \text{Interest}\text{time}\text{period}\end{array}\right)\\ =\$400,000\times 12\%\times \frac{6}{12}\\ =\$24,000\end{array}$ (6)

Calculate the interest expense on the bond.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest }-\text{ Premium}onBondsPayable\\ =\$24,000(6)-\$3,089(5)\\ =\$20,911\end{array}$ (7)