Financial & Managerial Accounting
Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Question
Chapter 12, Problem 12.4APR

1.

To determine

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.

Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note.

To Journalize: The entries to record the transactions.

1.

Expert Solution
Check Mark

Explanation of Solution

Journalize the entries to record the transactions.

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

2016 Cash   63,532,267  
July  1 Discount on Bonds Payable (1)   10,467,733  
  Bonds Payable     74,000,000
  (To record issue of bonds at discount)      
         
October 1 Cash   200,000  
  Notes Payable     200,000
  (To record issue of 6% notes for cash)      
         
December 31 Interest Expense   3,000  
  Interest Payable     3,000
  (To record interest accrued on installment note)      
         
December 31 Interest Expense (4)   4,331,693  
         Discount on Bonds Payable (2)     261,693
  Cash (3)     4,070,000
  (To record semiannual interest payment and amortization on bonds)      

Table (1)

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

2017 Interest Expense (4)   4,331,693  
June 30        Discount on Bonds Payable (2)     261,693
  Cash (3)     4,070,000
  (To record semiannual interest payment and amortization on bonds)      
         
September 30 Interest Expense   9,000  
  Interest Payable   3,000  
  Notes Payable   28,673  
  Cash     40,673
  (To record the annual payment on note)      
         
December 31 Interest Expense   2,570  
  Interest Payable     2,570
  To record interest accrued on installment note)      
         
December 31 Interest Expense (4)   4,331,693  
         Discount on Bonds Payable (2)     261,693
  Cash (3)     4,070,000
  (To record semiannual interest payment and amortization on bonds)      

Table (2)

Date Accounts and Explanation Post Ref.

Debit

($)

Credit

($)

2018 Bonds Payable   74,000,000  
June 30 Loss on Redemption of Bonds (6)   7,940,961  
          Discount on Bonds Payable     9,420,961
  Cash (5)     72,520,000
  (To record redemption of bonds)      
         
September 30 Interest Expense   7,710  
  Interest Payable   2,570  
  Notes Payable   30,393  
  Cash     40,673
  (To record the annual payment on note)      

Table (3)

Working notes:

Calculate discount on bonds payable.

Discount on bonds payable = (Face value  Cash received)   =$74,000,000$63,532,267=$10,467,733 (1)

Calculate discount on bonds payable semiannually.

 Discount on bonds payable semiannually)=DiscountonbondspayableperyearNumberofsemiannual=$10,467,73340=$261,693  (2)

Calculate the amount of cash interest.

 Cash interest = (Face value×Face interest rate× Interesttimeperiod)   =$74,000,000×11%×612 =$4,070,000 (3)

Calculate the interest expense on the bond.

Interest expense = Cash interest + Discount on bonds payable=$4,070,000+$261,693=$4,331,693 (4)

Calculate cash paid to redeem the bonds.

  Cash paid to redeem the bonds = Face value×0.98= $74,000,000×0.98=$72,520,000 (5)

Compute loss on the redemption of the bonds payable.

Loss on redemption of bonds payable}=(Cash paid to redeem the bonds+Discountonbondspayable)Bonds payable=$72,520,000+$9,420,961$74,000,000=$7,940,961 (6)

2016:

  • On July 1, Cash is debited as it increased the asset. Discount on bonds payable is debited as it decreased the liability. Bonds payable is credited as it increased the liability.
  • On October 1, Cash is debited as it increased the asset. Notes payable is credited as it increased the liability.
  • On December 31, interest expense is debited as it decreases the equity value. Interest payable is credited as it increased the liability.
  • On December 31, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.

2017:

  • On June 30, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
  • On September 30, interest expense is debited as it decreases the equity value. Interest payable and notes payable are debited as it decreased the liability. Cash is credited as it decreased the asset.
  • On December 31, interest expense is debited as it decreases the equity value. Interest payable is credited as it increased the liability.
  • On December 31, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.

2018:

  • On June 30, Bonds payable is debited as it decreased liability. Loss on redemption of bonds is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
  • On September 30, interest expense is debited as it decreases the equity value. Interest payable and notes payable are debited as it decreased the liability. Cash is credited as it decreased the asset.

2.

a.

To determine

The amount of interest expense in 2016.

2.

a.

Expert Solution
Check Mark

Explanation of Solution

Determine the amount of interest expense in 2016.

Total interest expense in Year 1 = $3,000 +$4,331,693=$4,334,693

Conclusion
Hence, the amount of total interest expense in 2016 is $4,334,693.

b.

To determine

The amount of interest expense in 2017.

b.

Expert Solution
Check Mark

Explanation of Solution

Determine the amount of interest expense in 2017.

Total interest expense in Year 2 = $4,331,693 +$9,000 +$2,570 + $4,331,693=$8,674,956

Conclusion
Hence, the amount of total interest expense in 2017 is $8,674,956.

3.

To determine

  The carrying amount of bonds as of December 31, 2017.

3.

Expert Solution
Check Mark

Explanation of Solution

Determine the carrying amount of bonds as of December 31, 2017.

Particulars Amount ($)
Initial carrying amount of bonds 63,532,267
Discount amortized on December 31, 2016 261,693
Discount amortized on June 30, 2017 261,693
Discount amortized on December 31, 2017 261,693
Carrying amount of bonds, December 31, 2017 64,317,346

Table (4)

Conclusion
The carrying amount of bonds as of December 31, 2017 is $64,317,346

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Chapter 12 Solutions

Financial & Managerial Accounting

Ch. 12 - Prob. 12.1APECh. 12 - Prob. 12.1BPECh. 12 - Issuing bonds at face amount On January 1, the...Ch. 12 - Prob. 12.2BPECh. 12 - Issuing bonds at a discount On the first day of...Ch. 12 - Prob. 12.3BPECh. 12 - Prob. 12.4APECh. 12 - Prob. 12.4BPECh. 12 - Prob. 12.5APECh. 12 - Prob. 12.5BPECh. 12 - Prob. 12.6APECh. 12 - Prob. 12.6BPECh. 12 - Redemption of bonds payable A 1,500,000 bond Issue...Ch. 12 - Prob. 12.7BPECh. 12 - Prob. 12.8APECh. 12 - Prob. 12.8BPECh. 12 - Prob. 12.9APECh. 12 - Prob. 12.9BPECh. 12 - Prob. 12.1EXCh. 12 - Prob. 12.2EXCh. 12 - Prob. 12.3EXCh. 12 - Prob. 12.4EXCh. 12 - Prob. 12.5EXCh. 12 - Prob. 12.6EXCh. 12 - Prob. 12.7EXCh. 12 - Entries for issuing and calling bonds; loss Adele...Ch. 12 - Entries for issuing and calling bonds; gain Emil...Ch. 12 - Entries for installment note transactions On the...Ch. 12 - Prob. 12.11EXCh. 12 - Entries for installment note transactions On...Ch. 12 - Prob. 12.13EXCh. 12 - Prob. 12.14EXCh. 12 - Prob. 12.15EXCh. 12 - Prob. 12.16EXCh. 12 - Present value of amounts due Tommy John is going...Ch. 12 - Present value of an annuity Determine the present...Ch. 12 - Prob. 12.19EXCh. 12 - Prob. 12.20EXCh. 12 - Prob. 12.21EXCh. 12 - Prob. 12.22EXCh. 12 - Amortize discount by interest method On the first...Ch. 12 - Prob. 12.24EXCh. 12 - Prob. 12.25EXCh. 12 - Prob. 12.26EXCh. 12 - Prob. 12.1APRCh. 12 - Prob. 12.2APRCh. 12 - Bond premium, entries for bonds payable...Ch. 12 - Prob. 12.4APRCh. 12 - Prob. 12.5APRCh. 12 - Prob. 12.6APRCh. 12 - Prob. 12.1BPRCh. 12 - Prob. 12.2BPRCh. 12 - Prob. 12.3BPRCh. 12 - Prob. 12.4BPRCh. 12 - Prob. 12.5BPRCh. 12 - Prob. 12.6BPRCh. 12 - Prob. 12.1CPCh. 12 - Prob. 12.2CPCh. 12 - Prob. 12.3CPCh. 12 - Preferred stock vs. bonds Xentec Inc. has decided...Ch. 12 - Prob. 12.5CPCh. 12 - Prob. 12.6CP
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