FUNDAMENTALS OF FINANCIAL ACCOUNTING
FUNDAMENTALS OF FINANCIAL ACCOUNTING
6th Edition
ISBN: 9781260664386
Author: PHILLIPS, LIBB
Publisher: MCG
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Chapter 10, Problem 6PB

1.

To determine

Prepare a bond amortization schedule.

1.

Expert Solution
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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 premium amortization schedule – Straight-line Amortization Method
Year Ending December 31

Cash Paid

(A)

(2)

Premium

Amortized

(B)

(3)

Interest Expense

(C) = (AB)

Bonds Payable

(D)

Premium on Bonds Payable

(E)

Carrying Value

(F) =(D+E)

01/01/

2018

$100,000$2,070 (1)$102,070

12/31/

2018

$5,000$690$4,310$100,000$1,380$101,380

12/31/

2019

$5,000$690 $4,310$100,000$690$100,690

12/31/

2020

$5,000$690 $4,310$100,0000$100,000

Table (1)

Working note (1):

Calculate the premium on bonds payable.

Premium on bonds payable = (Cash receivedFace value )   =$102,070$100,000=$2,070

Working note (2):

Calculate the amount of cash paid.

 Cash paid = (Face value×Stated interest rate× Interesttimeperiod)   =$100,000×5100×1 year=$5,000

Working note (3):

Calculate the premium amortized annually.

 Premium amortized annually)=PremiumonbondspayableNumberofyears=$2,0703=$690 

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

Premium on bonds payable = [(Previous balance ofpremium on bonds payable) + Premium amortized]

2.

To determine

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

2.

Expert Solution
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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.

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 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   102,070
    Premium on Bonds Payable (4)2,070
    Bonds Payable  100,000
(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 $102,070.
  • Premium on Bonds Payable is an adjunct liability account and it increases the value of liabilities. So, credit it by $2,070.
  • Bonds payable is a liability and it increases the value of liabilities. So, credit it by $100,000.

Working note (4):

Calculate the premium on bonds payable.

Premium on bonds payable = (Cash receivedFace value )   =$102,070$100,000=$2,070

3.

To determine

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

3.

Expert Solution
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Explanation of Solution

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

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2018Interest Expense (7) 4,310
Premium on Bonds Payable (5) 690
    Cash (6)5,000
(To record the payment of interest 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 $4,310.
  • Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $690.
  • Cash is an asset and it decreases the value of assets. So, credit it by $5,000.

Working note (5):

Calculate the premium amortized annually.

 Premium amortized annually)=PremiumonbondspayableNumberofyears=$2,0703=$690 

Working note (6):

Calculate the amount of cash interest.

 Cash interest = (Face value×Stated interest rate× Interesttimeperiod)   =$100,000×5100×1 year=$5,000

Working note (7):

Calculate the interest expense on the bond.

  Interest expense = Cash interest  Premium on bonds payable=$5,000 (6)$690 (5)=$4,310

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

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2019Interest Expense (10) 4,310
Premium on Bonds Payable (8) 690
    Cash (9)5,000
(To record the payment of interest and amortization of premium on bonds)   

Table (4)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $4,310.
  • Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $690.
  • Cash is an asset and it decreases the value of assets. So, credit it by $5,000.

Working note (8):

Calculate the premium amortized annually.

 Premium amortized annually)=PremiumonbondspayableNumberofyears=$2,0703=$690 

Working note (9):

Calculate the amount of cash interest.

 Cash interest = (Face value×Stated interest rate× Interesttimeperiod)   =$100,000×5100×1 year=$5,000

Working note (10):

Calculate the interest expense on the bond.

Interest expense = Cash interest  Premium on bonds payable=$5,000 (9)$690 (8)=$4,310

4.

To determine

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

4.

Expert Solution
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Explanation of Solution

Prepare journal entry for payment of interest and face value.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
December 31, 2020Interest Expense  4,310
 Bonds Payable 100,000 
Premium on Bonds Payable   690
    Cash 105,000
(To record the payment of interest and face value)   

Table (5)

  • Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $4,310.
  • Bonds payable is a liability and it decreases the value of liabilities. So, debit it by $100,000.
  • Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $690.
  • Cash is an asset and it decreases the value of assets. So, credit it by $105,000.

5.

To determine

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

5.

Expert Solution
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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 100,000
Premium on Bonds Payable690
Loss on Retirement of Bonds (12)1,310
    Cash 102,000
(To record the retirement of the bonds at premium) 

Table (6)

  • Bonds payable is a liability and it decreases the value of liabilities. So, debit it by $100,000.
  • Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $690.
  • Loss on retirement of bonds is a component of stockholder’s equity and it decreases the value of stockholder’s equity. So, debit it by $1,310.
  • Cash is an asset and it decreases the value of assets. So, credit it by $102,000.

Working note (11):

Calculate the carrying amount of bonds payable on the retirement.

  Carrying amount of bonds payable = (Face value +Unamortized premium )   =$100,000+$690 =$100,690

Working note (12):

Compute the loss on the redemption of the bonds payable.

Loss on redemption of bonds payable}=(Cash paid to retire the bonds)(Carrying amount of bonds payable)=($100,000×102100)$100,690(11)=$102,000$100,690=$1,310

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Chapter 10 Solutions

FUNDAMENTALS OF FINANCIAL ACCOUNTING

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