Bonds:
Bonds are a kind of the security which an investor invests in an entity for a specific period at a fixed interest rate. These bonds are issued at that time when entity needs huge amount of fund.
1.
Explanation of Solution
Issue of bonds at discount on January 1, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
January 1 | Cash | 3,456,448 | ||
Discount on bonds payable | 543,552 | |||
Bonds payable | 4,000,000 | |||
(To record the sold bonds at discount) |
Table (1)
- Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.
- Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which decrease the liabilities of the company. So, debit the discount on bonds payable account.
- Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.
2.
Cash payment, straight line amortization and bonds interest expense.
2.
Explanation of Solution
Given,
Amount of bond is $4,000,000.
Rate of interest is 6%.
Time period is 0.5.
Formula to calculate the cash at the time of issue of bond,
Substitute, $4,000,000 for the bond value, 6% for the rate on interest and 0.5 for time period.
Hence, cash payment is $120,000.
(b)
Given,
Par value of bond is $4,000,000.
Issued
Number of semiannual period is 30.
Formula to calculate the straight line discount amortization,
Substitute, $543,552 for the discount on bond and 30 for number of semiannual period,
Hence, amortization is $18,118.
Working note:
Calculation of discount on bond,
(c)
Given,
Cash payment is $120,000.
Amortization expense is $18,118.
Formula to calculate bonds interest payment expense,
Substitute, $120,000 for cash payment and $18,118 for amortization,
Hence, bonds interest expense is $138,118.
3.
Total amount of interest payable on bond.
3.
Explanation of Solution
Particulars | Amounts($) |
30 Regular outlays of $120,000 | 3,600,000 |
Par value at maturity | 4,000,000 |
Net repaid | 7,600,000 |
Less: money borrowed | 3,456,448 |
Bond interest expense | 4,143,552 |
Table (2)
Hence, total bond interest expense is $4,143,552.
4.
First two year of an amortization table.
4.
Explanation of Solution
End of semiannual period | UnamortizedDiscount($) | Carrying value($) |
January 1, 2017 | 543,552 | 3,456,448 |
June 30, 2017 | 525,434 | 3,474,566 |
December 31, 2017 | 507,316 | 3,492,684 |
June 30 ,2018 | 489,198 | 3,510,802 |
December 31, 2018 | 471,080 | 3,528,920 |
Table (3)
5.
Journal entry to record the first two interest payment.
5.
Explanation of Solution
Payment of interest on June 30, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
June 30 | Bonds interest expense | 138,118 | ||
Discount on bonds payable | 18,116 | |||
Cash | 120,000 | |||
(To record the paid semiannual interest and record amortization) |
Table (4)
- Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account
- Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount on bonds payable account.
- Cash is an asset account. Since the Cash is paid, the value of assets is decreased. So, credit the Cash account.
Payment of interest on December 31, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
Dec 31 | Bonds interest expense | 138,118 | ||
Discount on bonds payable | 18,116 | |||
Cash | 120,000 | |||
(To record the paid semiannual interest and record amortization) |
Table (5)
- Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account
- Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount on bonds payable account.
- Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the Cash account.
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Chapter 10 Solutions
FINANCIAL ACCT.FUNDAMENTALS <CUSTOM LL>
- Wilbury Corporation issued 1 million of 13.5% bonds for 985,071.68. The bonds are dated and issued October 1, 2019, are due September 30, 2020, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%. Required: 1. Prepare a bond interest expense and discount amortization schedule using the straight-line method. 2. Prepare a bond interest expense and discount amortization schedule using the effective interest method. 3. Prepare adjusting entries for the end of the fiscal year December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. If income before interest and income taxes of 30% in 2020 is 500,000, compute net income under each alternative. 5. Assume the company retired the bonds on June 30, 2020, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight line method of amortization b. effective interest method of amortization 6. Compute the companys times interest earned (pretax operating income divided by interest expense) for 2020 under each alternative.arrow_forwardCornerstone Exercise (Appendix 9A) Bond Issue Price On January 1, 2021, Callahan Auto issued $900,000 of 9%, 10-year bonds. Interest is payable semiannually on June 30 and December 31. Required: What is the issue price if the bonds are sold to yield 8%? (Note: Round to the nearest dollar.)arrow_forward
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