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 6PA

1.

To determine

Prepare a bond amortization schedule.

1.

Expert Solution
Check Mark

Explanation of Solution

Amortization Schedule: An amortization schedule is a table that shows the details of each loan payment allocated between the principal amount and the overdue interest along with the beginning and ending balance of the loan. From the amortization schedule of the loan, the periodical interest expense, total interest expense and total payment made are known.

Prepare a bond amortization schedule as below:

Bond discount amortization schedule – Straight-line Amortization Method
Year Ending December 31

Cash Paid

(A)

(2)

Discount

Amortized

(B)

(3)

Interest Expense

(C) = (A+B)

Bonds Payable

(D)

Discount on Bonds Payable

(E)

Carrying Value

(F) =(DE)

01/01/2018$600,000

$16,050

(1)

$583,950
12/31/2018$30,000$5,350$35,350$600,000$10,700$589,300
12/31/2019$30,000$5,350 $35,350$600,000$5,350$594,650
12/31/2020$30,000$5,350 $35,350$600,000 0$600,000

Table (1)

Working note (1):

Calculate the discount on bonds payable.

Discount on bonds payable = (Face value  Cash received)   =$600,000$583,950=$16,050

Working note (2):

Calculate the amount of cash paid.

 Cash paid = (Face value×Stated interest rate× Interesttimeperiod)   =$600,000×5%×1=$30,000

Working note (3):

Calculate the discount amortized annually.

 Discount amortized annually)=DiscountonbondspayableperyearNumberofyears=$16,0503=$5,350 

Note: Discount on bonds payable for each period is calculated by the following formula:

Discount on bonds payable = [Previous balance of discount on bonds payableDiscount amortized]

2.

To determine

Prepare journal entry to record the issuance of the bonds on January 1, 2018.

2.

Expert Solution
Check Mark

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.

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.

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

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

Prepare journal entry for cash proceeds from the issuance of the bonds on January 1, 2018.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
January 1, 2018Cash   538,950
Discount on Bonds Payable (4)16,050
    Bonds Payable  600,000
(To record issuance of bonds payable at discount) 

Table (2)

  • Cash is an asset and it increases the value of assets. So, debit it by $538,950.
  • Discount on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $16,050.
  • Bonds payable is a liability and it increases the value of liabilities. So, credit it by $600,000.

Working note (4):

Calculate the discount on bonds payable.

Discount on bonds payable = (Face value  Cash received)   =$600,000$583,950=$16,050

3.

To determine

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

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry for payment of interest and amortization of discount on bonds on 2018.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2018Interest Expense (7) 35,350
    Discount on Bonds Payable (5) 5,350
    Cash (6)30,000
 (To record payment of interest and amortization of discount on bonds)   

Table (3)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $35,350.
  • Discount on Bonds Payable is an adjunct liability account and it increases the value of liabilities. So, credit it by $5,350.
  • Cash is an asset and it decreases the value of assets. So, credit it by $30,000.

Working note (5):

Calculate the discount on bonds payable annually.

 Discount amortized annually)=DiscountonbondspayableperyearNumberofyears=$16,0503=$5,350 

Working note (6):

Calculate the amount of cash interest.

 Cash interest = (Face value×Stated interest rate× Interesttimeperiod)   =$600,000×5%×1=$30,000   

Working note (7):

Calculate the interest expense on the bond for 2018.

Interest expense = Cash interest + Discount on bonds payable=$30,000+$5,350=$35,350

Prepare journal entry for payment of interest and amortization of discount on bonds on 2019.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2019Interest Expense (10) 35,350
    Discount on Bonds Payable (8) 5,350
    Cash  (9)30,000
 (To record payment of interest and amortization of discount on bonds)   

Table (4)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $35,350.
  • Discount on Bonds Payable is an adjunct liability account and it increases the value of liabilities. So, credit it by $5,350.
  • Cash is an asset and it decreases the value of assets. So, credit it by $30,000.

Working note (8):

Calculate the discount on bonds payable annually.

 Discount amortized annually)=DiscountonbondspayableperyearNumberofyears=$16,0503=$5,350 

Working note (9):

Calculate the amount of cash interest.

 Cash interest = (Face value×Stated interest rate× Interesttimeperiod)   =$600,000×5%×1=$30,000   

Working note (10):

Calculate the interest expense on the bond for 2019.

Interest expense = Cash interest + Discount on bonds payable=$30,000+$5,350=$35,350

4.

To determine

Prepare journal entry to record the interest and face value payment on December 31, 2020.

4.

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry for payment of interest and face value.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2020Interest Expense (10) 35,350
 Bonds Payable 600,000 
    Discount on Bonds Payable (8) 5,350
    Cash 630,000
(To record the bonds are repaid with the discount)   

Table (5)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $35,350.
  • Bonds payable is a liability and it decreases the value of liabilities. So, debit it by $600,000.
  • Discount on Bonds Payable is an adjunct liability account and it increases the value of liabilities. So, credit it by $5,350.
  • Cash is an asset and it decreases the value of assets. So, credit it by $630,000.

5.

To determine

Prepare journal entry to record the bond retirement on January 1, 2020.

5.

Expert Solution
Check Mark

Explanation of Solution

Retirement of Bonds: The process of repaying the sale amount of bonds to bondholders at the time of maturity or before the maturity period is called as retirement of bonds. It is otherwise called as redemption of bonds.

Prepare Journal entry to record the bond retirement on January 1, 2020.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
January 1, 2020Bonds Payable 600,000
    Discount on Bonds Payable5,350
    Gain on Retirement of Bonds (13)6,650
     Cash (12)588,000
(To record the retirement of the bonds at discount) 

Table (6)

  • Bonds payable is a liability and it decreases the value of liabilities. So, debit it by $600,000.
  • Discount on Bonds Payable is an adjunct liability account and it increases the value liabilities. So, credit it by $5,350.
  • Gain on retirement of bonds is an equity account and it increases the equity value. So, credit it by $6,650.
  • Cash is an asset and it decreases the value of assets. So, credit it by $588,000.

Working note (11):

Calculate the carrying amount of bonds payable on the retirement.

  Carrying amount of bonds payable = (Face valueUnamortized discount )   =$600,000$5,350 =$594,650

Working note (12):

Calculate the cash paid to retire the bonds.

Cash paid to retire the bonds = Bond value × Retired price=$600,000×98%=$588,000

Working note (13):

Calculate the gain on the redemption of the bonds payable.

Gain on redemption of bonds payable}=(Carrying amount of bonds payable)(Cash paid to retire the bonds)=$594,650(11)$588,000(12)=$6,650

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 10 Solutions

Fundamentals Of Financial Accounting

Ch. 10 - Will the stated interest rate be higher than the...Ch. 10 - What is the carrying value of a bond payable?Ch. 10 - What is the difference between a secured bond and...Ch. 10 - Prob. 14QCh. 10 - Prob. 15QCh. 10 - Prob. 16QCh. 10 - Prob. 17QCh. 10 - (Supplement D) Over the period to maturity, why...Ch. 10 - Which of the following best describes Accrued...Ch. 10 - Prob. 2MCCh. 10 - Prob. 3MCCh. 10 - Prob. 4MCCh. 10 - Which of the following does not impact the...Ch. 10 - Which of the following is false when a bond is...Ch. 10 - To determine if a bond will be issued at a...Ch. 10 - A bond is issued at a price of 103 and retired...Ch. 10 - In a recent year. Land O Lakes, Inc., reported (in...Ch. 10 - Prob. 10MCCh. 10 - Recording Unearned Revenues A local theater...Ch. 10 - Prob. 2MECh. 10 - Prob. 3MECh. 10 - Reporting Payroll Tax Liabilities Refer to M10-3....Ch. 10 - Reporting Current and Noncurrent Portions of...Ch. 10 - Recording a Note Payable Greener Pastures...Ch. 10 - Reporting Interest and Long-Term Debt, Including...Ch. 10 - On February 6, 2017, the NYSE bond directory...Ch. 10 - E-Tech Initiatives Limited plans to issue...Ch. 10 - Repeat M10-9 assuming the bonds are issued at...Ch. 10 - Recording Bonds Issued at Face Value Schlitterbahn...Ch. 10 - Prob. 12MECh. 10 - Computing the Debt-to-Assets Ratio and the Times...Ch. 10 - Analyzing the Impact of Transactions on the...Ch. 10 - Prob. 15MECh. 10 - Prob. 16MECh. 10 - Prob. 17MECh. 10 - Prob. 18MECh. 10 - Prob. 19MECh. 10 - Prob. 20MECh. 10 - Prob. 21MECh. 10 - Determining Financial Statement Effects of...Ch. 10 - Recording a Note Payable through Its Time to...Ch. 10 - Recording Payroll Costs McLoyd Company completed...Ch. 10 - Recording Payroll Costs with and without...Ch. 10 - Prob. 5ECh. 10 - Prob. 6ECh. 10 - Preparing Journal Entries to Record Issuance of...Ch. 10 - Preparing Journal Entries to Record Issuance of...Ch. 10 - Prob. 9ECh. 10 - Calculating and Interpreting the Debt-to-Assets...Ch. 10 - Prob. 11ECh. 10 - Prob. 12ECh. 10 - Prob. 13ECh. 10 - Prob. 14ECh. 10 - (Supplement 10B) Recording the Effects of a...Ch. 10 - Prob. 16ECh. 10 - Prob. 17ECh. 10 - Determining Financial Effects of Transactions...Ch. 10 - Recording and Reporting Current Liabilities with...Ch. 10 - Recording and Reporting Current Liabilities...Ch. 10 - Comparing Bonds Issued at Par, Discount, and...Ch. 10 - Determining Financial Statement Reporting of...Ch. 10 - Prob. 6CPCh. 10 - Prob. 7CPCh. 10 - Prob. 8CPCh. 10 - Prob. 9CPCh. 10 - Prob. 10CPCh. 10 - Determining Financial Effects of Transactions...Ch. 10 - Recording and Reporting Current Liabilities with...Ch. 10 - Recording and Reporting Current Liabilities...Ch. 10 - Comparing Bonds Issued at Par, Discount, and...Ch. 10 - Prob. 5PACh. 10 - Prob. 6PACh. 10 - Prob. 7PACh. 10 - Prob. 8PACh. 10 - Prob. 9PACh. 10 - Prob. 1PBCh. 10 - Recording and Reporting Current Liabilities with...Ch. 10 - Prob. 3PBCh. 10 - Prob. 4PBCh. 10 - Recording and Explaining the Early Retirement of...Ch. 10 - Prob. 6PBCh. 10 - Prob. 7PBCh. 10 - Prob. 8PBCh. 10 - Zarina Corp. signed a new installment note on...Ch. 10 - Prob. 1COPCh. 10 - Prob. 1SDCCh. 10 - Prob. 2SDCCh. 10 - Prob. 4SDCCh. 10 - Prob. 5SDCCh. 10 - Prob. 6SDCCh. 10 - Prob. 7SDCCh. 10 - Prob. 8SDCCh. 10 - (Supplement 10C) Preparing a Bond Amortization...Ch. 10 - Nicole thinks that her business, Nicole’s Getaway...
Knowledge Booster
Similar questions
  • Chung Inc. issued $50,000 of 3-year bonds on January 1, 2018, with a stated rate of 4% and a market rate of 4%. The bonds paid interest semi-annually on June 30 and Dec. 31. How much money did the company receive when the bonds were issued? The bonds would be quoted at what rate?
    Bats Corporation issued 800,000 of 12% face value bonds for 851,705.70. The bonds were dated and issued on April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. Bats sold the bonds to yield 10%. Required: 1. Prepare a bond interest expense and premium amortization schedule using the straight-line method. 2. Prepare a bond interest expense and premium amortization schedule using the effective interest method. 3. Prepare any 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. Assume the company retires the bonds on June 30, 2020, at 103 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
    Dixon Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable annually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. June 30, 2019: entry to record payment of interest to bondholders C. June 30, 2019: entry to record amortization of discount D. June 30, 2020: entry to record payment of interest to bondholders E. June 30, 2020: entry to record amortization of discount
  • On January 1, a company issued a 5-year $100,000 bond at 6%. Interest payments on the bond of $6,000 are to be made annually. If the company received proceeds of $112,300, how would the bonds issuance be quoted? A. 1.123 B. 112.30 C. 0.890 D. 89.05
    Edward Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable semiannually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. A. July 1, 2018: entry to record issuing the bonds B. Dec. 31, 2018: entry to record payment of interest to bondholders C. Dec. 31, 2018: entry to record amortization of discount
    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.
    Recommended textbooks for you
  • Intermediate Accounting: Reporting And Analysis
    Accounting
    ISBN:9781337788281
    Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
    Publisher:Cengage Learning
    Principles of Accounting Volume 1
    Accounting
    ISBN:9781947172685
    Author:OpenStax
    Publisher:OpenStax College
    Cornerstones of Financial Accounting
    Accounting
    ISBN:9781337690881
    Author:Jay Rich, Jeff Jones
    Publisher:Cengage Learning
  • EBK CONTEMPORARY FINANCIAL MANAGEMENT
    Finance
    ISBN:9781337514835
    Author:MOYER
    Publisher:CENGAGE LEARNING - CONSIGNMENT
  • Intermediate Accounting: Reporting And Analysis
    Accounting
    ISBN:9781337788281
    Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
    Publisher:Cengage Learning
    Principles of Accounting Volume 1
    Accounting
    ISBN:9781947172685
    Author:OpenStax
    Publisher:OpenStax College
    Cornerstones of Financial Accounting
    Accounting
    ISBN:9781337690881
    Author:Jay Rich, Jeff Jones
    Publisher:Cengage Learning
    EBK CONTEMPORARY FINANCIAL MANAGEMENT
    Finance
    ISBN:9781337514835
    Author:MOYER
    Publisher:CENGAGE LEARNING - CONSIGNMENT