1.
Calculate the cash received from issuance of bonds.
1.
Answer to Problem 7CP
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.
2.
Prepare
2.
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 $1,000 per bond, to raise fund for financing the operations.
Premium on bonds payable: It occurs when the bonds are issued at a higher price than the face value.
Effective-interest amortization method: Effective-interest amortization method it is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.
Prepare journal entry for issuance of bonds payable on January 1, 2018.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
January 1, 2018 | Cash | 624,000 | ||
Premium on Bonds Payable (1) | 24,000 | |||
Bonds Payable | 600,000 | |||
(To record the issuance of bonds 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 liabilities. So, credit it by $600,000.
Working note (1):
Calculate the premium on bonds payable.
3.
Prepare journal entry to record the interest payment on December 31, 2018 and 2019.
3.
Explanation of Solution
Prepare journal entry to record the payment of interest and amortization of premium on bonds on December 31, 2018.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
December 31, 2018 | Interest Expense(3) | 49,920 | ||
Premium on Bonds Payable (4) | 4,080 | |||
Cash (2) | 54,000 | |||
(To record first payment of interest and amortization of premium on bonds) |
Table (2)
- Interest expense is a component of stockholder’s and it decreases the equity value. So, debit it by $49,920.
- Premium on Bonds Payable is an adjunct liability account and it decreases the value of liability. So, debit it by $4,080.
- Cash is an asset and it decreases the value of assets. So, credit it by $54,000.
Working note (2):
Calculate the cash interest payment.
Working note (3):
Calculate the interest expense.
Working note (4):
Calculate the premium amortized.
Prepare journal entry for the payment of interest and amortization of premium on bonds on December 31, 2019.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
December 31, 2019 | Interest Expense (6) | 49,594 | ||
Premium on Bonds Payable (7) | 4,406 | |||
Cash (5) | 54,000 | |||
(To record second payment of interest and amortization of premium on bonds) |
Table (3)
- Interest expense is an expense and it decreases the equity value. So, debit it by $49,594.
- Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $4,406.
- Cash is an asset and it is decreases the value of assets. So, credit it by $54,000.
Working note (5):
Calculate cash interest payment.
Working note (6):
Calculate the interest expense.
Working note (7):
Calculate the premium amortized.
4.
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.
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.
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and
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 $49,920
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: | 2018 | 2019 |
Bonds Payable | $600,000 | $600,000 |
Add: Premium on bonds payable |
19,920 (8) |
15,514 (9) |
Carrying Value | 619,920 | $615,514 |
Table (4)
Working note (8):
Calculate the premium on bonds payable for 2018.
Working note (9):
Calculate the premium on bonds payable for 2019.
Want to see more full solutions like this?
Chapter 10 Solutions
FUND. OF FINANCIAL ACCT W/CONNECT ACCES
- On January 1, 2024, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Payment Cash Payment Effective Interest Increase in Balance Outstanding Balance 6,221,759 1 356,000 373,306 17,306 6,239,065 2 356,000 374,344 18,344 6,257,409 3 356,000 375,445 19,445 6,276,854 4 356,000 376,611 20,611 6,297,465 5 356,000 377,848 21,848 6,319,313 6 356,000 379,159 23,159 6,342,472 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 356,000 505,452 149,452 8,573,656 39 356,000 514,419 158,419 8,732,075 40 356,000 523,925 167,925 8,900,000 Required: What is the face amount of the bonds? What is the initial selling price of the bonds? What is the term to maturity in years? Interest is determined by what approach? What is the stated annual interest rate? What is the effective annual interest rate? What is the total cash interest paid over the term to maturity? What is the total effective…arrow_forwardBond issue costs, such as printing fees, legal fees, commissions, etc. are most appropriately accounted for by a. charging them to an expense account in the year the bonds are actually sold. b. debiting them to unamortized bond issue costs, setting them as a deferred charge on the statement of financial position, and amortizing them in a manner similar to bond discount over the life of the bond. c. charging them to an expense account in the year the bonds are originally dated whether or not they are sold in that year. d. considering them in the measurement of the bonds payable.arrow_forwardOn January 1, 2024, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Payment Cash Payment Effective Interest Increase in Balance Outstanding Balance 6,286,574 1 370,000 377,194 7,194 6,293,768 2 370,000 377,626 7,626 6,301,394 3 370,000 378,084 8,084 6,309,478 4 370,000 378,569 8,569 6,318,047 5 370,000 379,083 9,083 6,327,130 6 370,000 379,628 9,628 6,336,758 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 370,000 432,132 62,132 7,264,327 39 370,000 435,860 65,860 7,330,187 40 370,000 439,813 69,813 7,400,000 Required: What is the face amount of the bonds? What is the initial selling price of the bonds? answer = $6,286,574 What is the term to maturity in years? answer = 20 years Interest is determined by what approach? answer = Effective interest rate What is the stated annual interest rate? What is the effective annual interest…arrow_forward
- On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Payment CashPayment EffectiveInterest Increase inBalance OutstandingBalance 7,218,650 1 270,000 288,746 18,746 7,237,396 2 270,000 289,496 19,496 7,256,892 3 270,000 290,276 20,276 7,277,168 4 270,000 291,087 21,087 7,298,255 5 270,000 291,930 21,930 7,320,185 6 270,000 292,807 22,807 7,342,992 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 270,000 350,010 80,010 8,830,251 39 270,000 353,210 83,210 8,913,461 40 270,000 356,539 86,539 9,000,000 Required:1. What is the face amount of the bonds?2. What is the initial selling price of the bonds?3. What is the term to maturity in years?4. Interest is determined by what approach?5.…arrow_forwardOn January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Payment CashPayment EffectiveInterest Increase inBalance OutstandingBalance 7,218,650 1 270,000 288,746 18,746 7,237,396 2 270,000 289,496 19,496 7,256,892 3 270,000 290,276 20,276 7,277,168 4 270,000 291,087 21,087 7,298,255 5 270,000 291,930 21,930 7,320,185 6 270,000 292,807 22,807 7,342,992 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 270,000 350,010 80,010 8,830,251 39 270,000 353,210 83,210 8,913,461 40 270,000 356,539 86,539 9,000,000 5. What is the stated annual interest rate?6. What is the effective annual interest rate?7. What is the total cash interest paid over the term to maturity?8. What is the total effective…arrow_forwardq9. Bond premium should be reported in the statement of financial positionA. along with other premium accounts such as those resulting from stock transactions.B. as deferred credit.C. as a direct addition to the face amount of the bonds.D. as a deduction from the face of the bonds.arrow_forward
- Bond issuance costs must be reported separately as deferred charges and charged to expense over the life of the bond issue. t or f?arrow_forward(Debt Investments) Presented below is information taken from a bond investment amortization schedule with related fair values provided. These bonds are classified as available-for-sale. 12/31/17 12/31/18 12/31/19 Amortized cost $491,150 $519,442 $550,000 Fair value 497,000 509,000 550,000 Instructions(a) Indicate whether the bonds were purchased at a discount or at a premium.(b) Prepare the adjusting entry to record the bonds at fair value at December 31, 2017. The Fair Value Adjustment account has a debit balance of $1,000 prior to adjustment.(c) Prepare the adjusting entry to record the bonds at fair value at December 31, 2018.arrow_forwardq3. For accounting purposes, interest expense recognized on bonds payable should be based on theA. effective interest rate, considering the issue price and the transaction costs.B. nominal interest rate.C. rate stated on the face of the bonds.D. market rate of interest on the reporting date.arrow_forward
- If the company issued RO 100,000 , 5% interest, 10-year bonds at 98 on January 1, 2021, which of the following is the correct accounting entry on the date of issuance? a. the company will record premium on bonds payable, RO 200 b. the company will record discount on bonds payable, RO 2,000 c. the company will record premium on bonds payable, RO 2,000 d. the company will record discount on bonds payable, RO 200arrow_forwardIn its December 31, 2018 balance sheet, at what amount should Rio report the carrying value of the bonds?arrow_forwardThe following information pertains to BARU NUTS Company's issuance of bonds on July 1, 2021:* What should be the issue price of the bonds?arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning