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.
To prepare:
Explanation of Solution
Issue of bonds at discount on January 1, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
Jan 1 | Cash | 292,181 | ||
Discount on bonds payable | 32,819 | |||
Bonds payable | 325,000 | |||
(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.
Working Notes:
Given,
Value of bonds is $325,000.
Market value of bonds is $292,181.
Calculate the amount of the discount on bonds payable,
2.
Net expense of interest on bond.
2.
Explanation of Solution
Particulars | Amounts($) |
Amount repaid: | |
Interest payment | 65,000 |
Add: Maturity value | 325,000 |
Repaid amount | 390,000 |
Less: Borrowed amount | 292,181 |
Net expense of interest on bond | 97,819 |
Table (2)
Hence, net expense interest on bond is $97,819.
Working notes:
Given,
Rate of interest is 5%.
Time period is 0.5.
Calculation of amount of the interest paid at semiannual period,
Calculation of amount of interest repaid,
3.
First two year of an amortization table.
3.
Explanation of Solution
End of semiannual period | UnamortizedDiscount ($) | Carrying value ($) |
January 1, 2017 | 32,819 | 292,181 |
June 30, 2017 | 28,717 | 292,283 |
December 31, 2017 | 24,615 | 300,385 |
June 30 ,2018 | 20,513 | 304,487 |
December 31, 2018 | 16,411 | 308,589 |
Table (3)
Hence, unamortized discount on December 31, 2018 is $16,411 and carrying value account is $308,589.
4.
To prepare: Journal entry to record the first two interest payment.
4.
Explanation of Solution
Payment of interest on June 30, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
June 30 | Bonds interest expense | 12,227 | ||
Discount on bonds payable | 4,102 | |||
Cash | 8,125 | |||
(To record the paid semiannual interest and record amortization) |
Table (4)
- Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account
- Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount on bonds payable account.
- Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.
Payment of interest on December 31, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
Dec 31 | Bonds interest expense | 12,227 | ||
Discount on bonds payable | 4,102 | |||
Cash | 8,125 | |||
(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.
5.
Change affect the amount reported on legacy’s financial statement.
5.
Explanation of Solution
- If the bonds are issued at the 4% instead of the 8%, then bonds will be issued at premium. As the rate of interest on account for 5% which is more than
rate of return in the new market. - The change in the market rate of interest increases the bond liability of the company in the balance sheet. But, the bond liability decreases gradually with amortization of the premium.
- In this case, the cash flow statement will show greater amount pertain to receipt of the cash during the year under the borrowing head.
Working note:
Given,
Total discount on bonds payable is $32,819.
Number of payment is 8.
Calculation of discount on bond payable on the first two bond expense,
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Chapter 10 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
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