Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
Question
Chapter 10, Problem 6CP

1.

To determine

Calculate the cash received from issuance of bonds.

1.

Expert Solution
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Answer to Problem 6CP

The cash received from issuance of bonds is $624,000.

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.

Calculate the cash received from issuance of bonds.   

Cashreceivedfromissuanceofbonds=Facevalueofbonds×Issuepriceofbonds=$600,000×104100=$624,000

Conclusion

Therefore, the cash received from issuance of bonds is $624,000.

2.

To determine

Prepare journal entry to record issuance of bonds payable.

2.

Expert Solution
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Explanation of Solution

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 higher price than the face value.

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

Prepare journal entry for issuance of bonds payable on January 1, 2018.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
January 1, 2018Cash  624,000 
    Premium on Bonds Payable (1)  24,000
     Bonds Payable  600,000
 (To record bonds issued at premium)   

Table (1)

  • Cash is an asset and it increases the value of assets. So, debit it by $624,000.
  • Premium on Bonds Payable is an adjunct liability account and it increases the value of liabilities. So, credit it by $24,000.
  • Bonds payable is a liability and it increases the value of liabilities. So, credit it by $600,000.

Working note (1):

Calculate premium on bonds payable.

Premium on bonds payable=CashreceivedFace value of bonds=$624,000$600,000=$24,000

3.

To determine

Prepare journal entries to record the interest payment on December 31, 2018 and 2019.

3.

Expert Solution
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Explanation of Solution

Prepare journal entry for the payment of interest and amortization of premium on bonds on December 31, 2018.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2018Interest Expense(4) 49,200
Premium on Bonds Payable (2) 4,800
    Cash (3)54,000
(To record the first payment of interest expense and amortization of premium on bonds)   

Table (2)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $49,200.
  • Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $4,800.
  • Cash is an asset and it decreases the value of assets. So, credit it by $54,000.

Working note (2):

Calculate the premium on bonds payable annually.

Premium on bonds payableannually}=(Premium on bonds payable per yearNumberofYears)=$24,0005=$4,800   

Working note (3):

Calculate the amount of cash interest payment.

Cash interest payment=(Face value×Stated interest rate×Interest time period)=$600,000×9100×1212=$54,000   

Working note (4):

Calculate the interest expense on the bond.

InterestExpense=CashInterest payment  PremiumonBondsPayable=$54,000$4,800=$49,200

Prepare journal entry for the payment of interest and amortization of premium on bonds on December 31, 2019.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2019Interest Expense (7) 49,200
 Premium on Bonds Payable  (5) 4,800
    Cash (6)54,000
(To record second payment of interest expense and amortization of premium on bonds)   

Table (3)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $49,200.
  • Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $4,800.
  • Cash is an asset and it decreases the value of assets. So, credit it by $54,000.

Working note (5):

Calculate the premium on bonds payable annually.

Premium on bonds payableannually}=(Premium on bonds payable per yearNumberofYears)=$24,0005=$4,800

Working note (6):

Calculate the amount of cash interest payment.

Cash interest payment=(Face value×Stated interest rate×Interest time period)=$600,000×9100×1=$54,000   

Working note (7):

Calculate the interest expense on the bond.

InterestExpense=CashInterest payment  PremiumonBondsPayable=$54,000$4,800=$49,200

4.

To determine

Calculate the interest expense that would be reported on the income statements for 2018 and 2019, and show the presentation of bonds that would be reported on the balance sheet at December 31, 2018 and 2019.

4.

Expert Solution
Check Mark

Explanation of Solution

Calculate the interest expense that would be reported on the income statements for 2018 and 2019 as follows:

The amount of interest expense that would be reported on the income statements for 2018 and 2019 is $49,200 (refer working note 4 and 7).

The presentation of bonds that would be reported in on the balance sheet is as shown below:

Corporation S

Balance Sheet (Partial)

As of December 31

Long-term Liabilities:20182019
   Bonds Payable $600,000$600,000
   Add: Premium on bonds payable19,200 (8)

14,400

(9)

Carrying Value619,200$614,400

Table (4)

Working note (8):

Calculate the premium on bonds payable for 2018.

Premium on bonds payable for 2018 =(Premium bonds payable at the time of purchasePremium on bond paid during the year 2018)=$24,000$4,800=$19,200

Working note (9):

Calculate the premium on bonds payable for 2019.

Premium on bonds payable =[Preminum on bond payable for 2018Premium on bond paid durint the year 2019]=$19,200 (8) $4,800=$14,400

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Chapter 10 Solutions

Fundamentals Of Financial Accounting

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