Financial Accounting Fundamentals:
Financial Accounting Fundamentals:
5th Edition
ISBN: 9780078025754
Author: John Wild
Publisher: McGraw-Hill/Irwin
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Chapter 10, Problem 1E

1.

To determine

Calculate the interest paid to bondholders every six months.

1.

Expert Solution
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Explanation of Solution

Calculate the semi-annual interest.

Semi-annualinterestpayment)=Parvalueofbond×Interestrate×612=$3,400,000×9%×612=$153,000

Therefore the interest paid to bondholders is $153,000.

Note: Time period = 6 months.

2.

To determine

Prepare journal entries.

2.

Expert Solution
Check Mark

Explanation of Solution

(a)

Prepare journal entries for the issuance of bonds on January 1, 2015.

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

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
DateAccounts and ExplanationsDebit ($)Credit ($)
2015   
January1Cash3,400,000 
  Bonds Payable 3,400,000
  (To record sale of bonds on par)  

Table (1)

  • Cash is an asset account. The amount has increased because bonds are issued at a premium; therefore, debit Cash account with $3,400,000.
  • Bonds Payable is a liability account and it is increased therefore; credit Bonds Payable account with $3,400,000.

(b)

Prepare journal entries to record interest payment on June 30, 2017.

DateAccounts title and ExplanationsDebit ($)Credit ($)
2015   
June30Bond Interest Expense (1)153,000 
       Cash 153,000
  (To record the payment of  semi-annual interest)  

Table (2)

  • Bond Interest Expense is a component of stockholders equity. There is an increase in the expense account which decreased the stockholders’ equity. Therefore, debit interest expense account by $153,000.
  • Cash is an asset account and it is decreased. Therefore credit cash account by $153,000

Working Notes:

Calculate amount of interest payable.

Interest payable =Face value of bonds×Interest rate×Time period=$3,400,000 ×9100×612=$153,000 (1)

Note: Time period = 6 months (January, 2015 to June 30, 2015)

(C)

Prepare journal entries to record interest payment on December 31, 2017.

DateAccounts title and ExplanationsDebit ($)Credit ($)
2015   
June30Bond Interest Expense (2)153,000 
       Cash 153,000
  (To record the payment of  semi-annual interest)  

Table (3)

  • Bond Interest Expense is a component of stockholders equity. There is an increase in the expense account which decreased the stockholders’ equity. Therefore, debit interest expense account by $153,000.
  • Cash is an asset account and it is decreased. Therefore credit cash account by $153,000

Working Notes:

Calculate amount of interest payable.

Interest payable =Face value of bonds×Interest rate×Time period=$3,400,000 ×9100×612=$153,000 (2)

Note: Time period = 6 months (June 30, 2015 to December 31, 2015)

3.

To determine

Prepare journal entries for issuance of bonds.

3.

Expert Solution
Check Mark

Explanation of Solution

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

Discount on bonds payable:

Discount on bonds payable occurs when the bonds are issued at a lower price than the face value.

Premium on bonds payable:

Premium on bonds payable occurs when the bonds are issued at a higher price than the face value of bond.

(a)

Prepare journal entries for issuance of bonds at $98.

DateAccount title and explanation

Debit

$

Credit

$

2015Cash (3)3,332,000 
January 1Discount on Bonds Payable(4)68,000
 Bonds Payable 3,400,000
 (To record issued bonds payable at a discount)  

Table (4)

  • Cash is an asset and it is increased. So, debit it by $3,332,000.
  • Discount on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $68,000.
  • Bonds payable is a liability and it is increased. So, credit it by $3,400,000.

Working note:

Calculate the cash received on issuance of bond in discount:

Cashreceived=Parvalueofbond×Salepriceofbond=$3,400,000×0.98=$3,332,000 (3)

Calculate the discount on bonds payable:

Discount on bonds payable=Face valueof bondsCashreceived=$3,400,000$3,332,000=$68,000 (4)

(b)

Prepare journal entries for issuance of bonds at $102.

DateAccounts and ExplanationsDebit ($)Credit ($)
2015   
January1Cash  (5)3,468,000 
  Premium on Bonds Payable ( (6) 68,000
  Bonds Payable 3,400,000
  (To record sale of bonds on premium)  

Table (5)

  • Cash is an asset account. The amount has increased because bonds are issued at a premium; therefore, debit Cash account with $3,468,000.
  • Premium on Bonds Payable is an adjunct account to Bonds Payable account and it has a normal credit balance; therefore, credit Premium on Bonds Payable account with $68,000.
  • Bonds Payable is a liability account and it is increased therefore; credit Bonds Payable account with 3,400,000.

Working note:

Calculate the cash received on issuance of bond on premium:

Cashreceived=Parvalueofbond×Salepriceofbond=$3,400,000×1.02=$3,468,000 (5)

Calculate the premium on bonds payable:

Premium on bonds payable=CashreceivedFace valueof bonds=$3,468,000$3,400,000=$68,000 (6)

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Chapter 10 Solutions

Financial Accounting Fundamentals:

Ch. 10 - Prob. 6DQCh. 10 - Prob. 7DQCh. 10 - Prob. 8DQCh. 10 - Prob. 9DQCh. 10 - Prob. 10DQCh. 10 - Prob. 11DQCh. 10 - Prob. 12DQCh. 10 - Prob. 13DQCh. 10 - Prob. 14DQCh. 10 - Prob. 15DQCh. 10 - Prob. 16DQCh. 10 - Prob. 17DQCh. 10 - Prob. 18DQCh. 10 - Prob. 19DQCh. 10 - Prob. 20DQCh. 10 - Prob. 1QSCh. 10 - Prob. 2QSCh. 10 - Prob. 3QSCh. 10 - Prob. 4QSCh. 10 - Prob. 5QSCh. 10 - Prob. 6QSCh. 10 - Prob. 7QSCh. 10 - Prob. 8QSCh. 10 - Prob. 9QSCh. 10 - Prob. 10QSCh. 10 - Prob. 11QSCh. 10 - Prob. 12QSCh. 10 - Prob. 13QSCh. 10 - Prob. 14QSCh. 10 - Prob. 15QSCh. 10 - Prob. 16QSCh. 10 - Prob. 17QSCh. 10 - Prob. 18QSCh. 10 - Prob. 19QSCh. 10 - Prob. 20QSCh. 10 - Prob. 1ECh. 10 - Prob. 2ECh. 10 - Prob. 3ECh. 10 - Prob. 4ECh. 10 - Prob. 5ECh. 10 - Prob. 6ECh. 10 - Prob. 7ECh. 10 - Prob. 8ECh. 10 - Prob. 9ECh. 10 - Prob. 10ECh. 10 - Prob. 11ECh. 10 - Prob. 12ECh. 10 - Prob. 13ECh. 10 - Prob. 14ECh. 10 - Prob. 15ECh. 10 - Prob. 16ECh. 10 - Prob. 17ECh. 10 - Prob. 18ECh. 10 - Prob. 19ECh. 10 - Prob. 20ECh. 10 - Prob. 1APCh. 10 - Prob. 2APCh. 10 - Prob. 3APCh. 10 - Prob. 4APCh. 10 - Prob. 5APCh. 10 - Prob. 6APCh. 10 - Prob. 7APCh. 10 - Prob. 8APCh. 10 - Prob. 9APCh. 10 - Prob. 10APCh. 10 - Prob. 11APCh. 10 - Prob. 1BPCh. 10 - Prob. 2BPCh. 10 - Prob. 3BPCh. 10 - Prob. 4BPCh. 10 - Prob. 5BPCh. 10 - Prob. 6BPCh. 10 - Prob. 7BPCh. 10 - Prob. 8BPCh. 10 - Prob. 9BPCh. 10 - Prob. 10BPCh. 10 - Prob. 11BPCh. 10 - Prob. 10SPCh. 10 - Prob. 1BTNCh. 10 - Prob. 2BTNCh. 10 - Prob. 3BTNCh. 10 - Prob. 4BTNCh. 10 - Prob. 7BTNCh. 10 - Prob. 9BTN
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