Financial Accounting for Undergraduates
Financial Accounting for Undergraduates
2nd Edition
ISBN: 9781618530400
Author: FERRIS
Publisher: Cambridge
bartleby

Videos

Question
Book Icon
Chapter 10, Problem 7BP

a.

To determine

Prepare a journal entry to record the issuance of the bonds with accrued interest.

a.

Expert Solution
Check Mark

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Journalize the entry for the issue of bonds:

DateAccount Titles and Explanation

Debit

($)

Credit

($)

Year 1Cash  (2)824,000
 March 1     Bonds payable800,000
      Interest Payable (1) 24,000
(To record 6%, $500,000 bonds at face value with accrued interest.)

Table (1)

  • Cash is an asset and it is increased. Therefore cash is debited by $824,000.
  • Bonds payable is a liability and it is increased. Therefore credit bonds payable account by $800,000.
  • Interest payable is a liability and it is increased. Therefore credit interest payable account by $24,000.

Calculate the accrued interest as of July 1:

Interest expense=(Face value×Face interest rate×Interest time period)=$800,000×9%×412=$24,000

Note: Interest time period = 4 months (March 1 to July 1)

(1)

Calculate the amount of cash received from the issue of bonds with accrued interest:

ParticularsAmount
Face value$800,000
Add: Accrued interest$24,000 (1)
Cash received with accrued interest $824,000

Table (2)

(2)

b.

To determine

Record the payment of semiannual interest on September 1 in the journal entry.

b.

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry for the payment of semiannual interest on September 1.

DateAccount Titles and Explanation

Debit

($)

Credit

($)

Year 1Interest Expense (3)12,000
September 1Interest Payable24,000
      Cash (4) 36,000
(To record payment of semiannual interest.)

Table (3)

  • Interest Expense is a component of stockholders’ equity and there is an increase in the interest expense account which decreased the stockholders’ equity. Therefore debit interest expense account by $12,000.
  • Interest payable is a liability and it is decreased. Therefore debit interest payable account by $24,000.
  • Cash is an asset and it is decreased. Therefore credit cash account by $36,000.

Working note:

Calculate the interest expense for September 1:

Interest expense=(Face value×Face interest rate×Interest time period)=$800,000×9%×212=$12,000

Note: Interest time period = 2 month (July 1 to September 1)

(3)

Calculate the amount of cash to be for the first semiannual interest:

ParticularsAmount
Interest Payable $24,000 (1) 
Add: Interest Expense $12,000 (2) 
Cash received with accrued interest $36,000

Table (4)

(4)

c.

To determine

Prepare a journal entry to record the accrued interest expense on December 31, year 1.

c.

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry to record the journal entry for interest accrual on December 31, 2011:

DateAccount Titles and Explanation

Debit

($)

Credit

($)

Year 1Interest Expense (5)24,000
December 31    Interest Payable24,000
(To record accrual of interest expense.)

Table (5)

  • Interest Expense is a component of stockholders’ equity and there is an increase in the interest expense account which decreased the stockholders’ equity. Therefore debit interest expense account by $24,000.
  • Interest payable is a liability and it is increased. Therefore credit interest payable account by $24,000.

Working Notes:

Calculate the amount of interest as on December 31, 2011.

Interest expense=(Face value×Face interest rate×Interest time period)=$800,000×9%×412=$24,000

Note: Interest time period = 2 months (September 1 to December 31)

(5)

d.

To determine

Prepare journal entry to record the payment of semiannual interest on March 1, Year 2.

d.

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry to record the journal entry for payment of semiannual interest on March 1:

DateAccount Titles and Explanation

Debit

($)

Credit

($)

Year 2Interest Expense (6)12,000
 March1Interest Payable24,000
      Cash 36,000
(To record payment of semiannual interest.)

Table (6)

  • Interest Expense is a component of stockholders’ equity and there is an increase in the interest expense account which decreased the stockholders’ equity. Therefore debit interest expense account by $12,000.
  • Interest payable is a liability and it is decreased. Therefore debit interest payable account by $24,000.
  • Cash is an asset and it is decreased. Therefore credit cash account by $36,000.

Working Notes:

Calculate the amount of interest as on May 1, Year 2:

Interest expense=Face value×Face interest rate×Interest time period=$800,000×9%×212=$12,000

Note: Interest time period = 2 months (December 31 March 1)

(6)

e.

To determine

Prepare the journal entry for the retirement of bonds payable before maturity.

e.

Expert Solution
Check Mark

Explanation of Solution

Record the journal entry:

DateAccount Titles and Explanation

Debit

($)

Credit

($)

Year 2Bonds Payable200,000
 May 1Loss on Retirement of Bonds Payable (7)2,000
      Cash 202,000
(To record 9%, $500,000 bonds at face value with accrued interest.)

Table (7)

  • Bonds Payable is a liability and it is decreased. Therefore debit bonds payable account by $200,000.
  • Loss on Retirement of Bonds Payable is a component of stockholders equity and there is an increase in the loss on retirement of bonds payable which decreases the stockholders’ equity. Therefore debit loss on retirement of bonds payable account by $2,000.
  • Cash is an asset account and it is decreased. Therefore credit cash account by $202,000.

Working note:

Calculate the loss on retirement of bonds payable:

ParticularsAmount
Cash to be paid at the time of bond retirement $202,000
Face value of bonds retired $200,000
Loss on Retirement of Bonds Payable $2,000

Table (8)

(7)

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

Financial Accounting for Undergraduates

Ch. 10 - Prob. 11SSQCh. 10 - Prob. 1QCh. 10 - Prob. 2QCh. 10 - Prob. 3QCh. 10 - Prob. 4QCh. 10 - Prob. 5QCh. 10 - Prob. 6QCh. 10 - Prob. 7QCh. 10 - Prob. 8QCh. 10 - Prob. 9QCh. 10 - Prob. 10QCh. 10 - Prob. 11QCh. 10 - Prob. 12QCh. 10 - Prob. 13QCh. 10 - Prob. 14QCh. 10 - Prob. 15QCh. 10 - Prob. 16QCh. 10 - Prob. 17QCh. 10 - Prob. 18QCh. 10 - Prob. 19QCh. 10 - Prob. 1SECh. 10 - Prob. 2SECh. 10 - Prob. 3SECh. 10 - Prob. 4SECh. 10 - Prob. 5SECh. 10 - Prob. 6SECh. 10 - Prob. 7SECh. 10 - Prob. 8SECh. 10 - Prob. 9SECh. 10 - Prob. 10SECh. 10 - Prob. 1AECh. 10 - Prob. 2AECh. 10 - Prob. 3AECh. 10 - Prob. 4AECh. 10 - Prob. 5AECh. 10 - Prob. 6AECh. 10 - Prob. 7AECh. 10 - Prob. 8AECh. 10 - Prob. 9AECh. 10 - Prob. 10AECh. 10 - Prob. 11AECh. 10 - Prob. 12AECh. 10 - Prob. 13AECh. 10 - Prob. 14AECh. 10 - Prob. 15AECh. 10 - Prob. 16AECh. 10 - Prob. 17AECh. 10 - Prob. 1BECh. 10 - Prob. 2BECh. 10 - Prob. 3BECh. 10 - Prob. 4BECh. 10 - Prob. 5BECh. 10 - Prob. 6BECh. 10 - Prob. 7BECh. 10 - Prob. 8BECh. 10 - Prob. 9BECh. 10 - Prob. 10BECh. 10 - Prob. 11BECh. 10 - Prob. 12BECh. 10 - Prob. 13BECh. 10 - Prob. 14BECh. 10 - Prob. 15BECh. 10 - Prob. 16BECh. 10 - Prob. 17BECh. 10 - Prob. 1APCh. 10 - Prob. 2APCh. 10 - Prob. 3APCh. 10 - Prob. 4APCh. 10 - Prob. 5APCh. 10 - Prob. 6APCh. 10 - Prob. 7APCh. 10 - Prob. 8APCh. 10 - Prob. 9APCh. 10 - Prob. 10APCh. 10 - Prob. 1BPCh. 10 - Prob. 2BPCh. 10 - Prob. 3BPCh. 10 - Prob. 4BPCh. 10 - Prob. 5BPCh. 10 - Prob. 6BPCh. 10 - Prob. 7BPCh. 10 - Prob. 8BPCh. 10 - Prob. 9BPCh. 10 - Prob. 10BPCh. 10 - Prob. 10SPCh. 10 - Prob. 1EYKCh. 10 - Prob. 2EYKCh. 10 - Prob. 3EYKCh. 10 - Prob. 4EYKCh. 10 - Prob. 5EYKCh. 10 - Prob. 6EYKCh. 10 - Prob. 7EYKCh. 10 - Prob. 8EYKCh. 10 - Prob. 9EYKCh. 10 - Prob. 10EYKCh. 10 - Prob. 11EYK
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Financial Accounting - Long-term Liabilities - Bonds; Author: Finance & Accounting Videos by Prof Coram;https://www.youtube.com/watch?v=_1fwsJIGMos;License: Standard Youtube License