Chapter 10, Problem 5PSA

Summary Introduction

Introduction:Bond issuance refers to the process of raising, money from investors by issuing the bonds. Bonds are assumed debt on the company as there raise the liability of the company.

To determine: Journal entry to record the bond issuance.

Answer to Problem 5PSA

Discount on bond issuance is $\$32,819$

Explanation of Solution

Prepare Journal Entry on 1^stJanuary 2016

Date	Particulars	Debit	Credit
Jan1	Cash	$\$292,181$
	Discount on bonds payable	$\$32,819$
	Bonds payable		$\$325,000$
	(Being discount on bond issued)

Working Note:-

  $\begin{array}{l}Discountonbond=\left(\$325,000-\$292,181\right)\hfill \\ Discountonbond=\$32,819\hfill \end{array}$

2.

Summary Introduction

Introduction: Bond issuance refers to the process of raising, money from investors by issuing the bonds. Bonds are assumed debt on the company as there raise the liability of the company.

To determine: Total bond interest expenses which is over the lifetime of bond.

Answer to Problem 5PSA

Total bond interest expenses are $\$97,819$

Explanation of Solution

Determine the total bond interest expense:

Interest expense = $Cashpaid+Discountonbonds$

  = $\left(\$325,000\times 5\%\times 4\right)+\left(\$32,819\right)$

  = $\$65,000+\$32,819$

  = $\$97,819$

3.

Summary Introduction

Introduction: Bond issuance refers to the process of raising, money from investors by issuing the bonds. Bonds are assumed debt on the company as there raise the liability of the company.

To determine: Under straight line amortization for bonds’ first two years.

Explanation of Solution

Amortization Table

$32,819/8 =4,102

Date	Unamortized Discount	Carrying Value
1/01/2016	$32,819$	$292,181$
30/06/2016	$\begin{array}{l}\left(32,819-4,102\right)=28,717\hfill \end{array}$	$\left(292,181+4,102\right)=296,283$
31/12/2016	$\left(28,717-4,102\right)=24,615$	$\left(296,283+4,102\right)=300,385$
30/06/2017	$\left(24,615-4,102\right)=20,513$	$\left(300,385+4,102\right)=304,487$
31/12/2017	$\left(20,513-4,102\right)=16,411$	$\left(304,487+4,102\right)=308,589$

4.

Summary Introduction

Introduction: Bond issuance refers to the process of raising, money from investors by issuing the bonds. Bonds are assumed debt on the company as there raise the liability of the company.

To determine: Journal entry for interest payments for first two interest payment.

Explanation of Solution

Date	Particulars	Debit	Credit
30/06/2016	Interest Expense	$\$11,687.24$
	Discount on bonds payable		$\$3,562.24$
	Cash		$\$8,125$
	( Being bonds issued on discount)
31/12/2016	Interest Expense	$\$11,687.24$
	Discount on bonds payable		$\$3,562.24$
	Cash		$\$8,125$
	( Being bonds issued on discount)

Working Note:-

On 30^th June 2016,

Interest Expense $\left(\$292,181\times 4\%\right)=\$11,687.24$

Amortize Discount $\left(\$11,687.24-\$8,125\right)=\$3,562.24$

Cash $\left(\$325,000\times 2.5\%\right)=\$8,125$

On 31^st December 2016,

Interest Expense $\left(\$295,743.24\times 4\%\right)=\$11,829.73$

Amortize Discount = $\left(\$11,829.73-\$8,125\right)=\$3,704.73$

5.

Summary Introduction

Introduction: Bond issuance refers to the process of raising, money from investors by issuing the bonds. Bonds are assumed debt on the company as there raise the liability of the company.

To determine: Changes that affect the amount reported on financial statement

Answer to Problem 5PSA

Bonds are issued at premium as the contract rate is more than the market rate of the bond on date of issue.

Explanation of Solution

Bonds are issued at premium if the contract rate is more than the market rate of the bond on date of issue. On 1 January 2016 market rate is 4% and contract rate of bond is 5%. This implies that the bonds are issued at premium and total amount also includes the amount of premium which is received by issuer from the bondholders.