INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 14, Problem 14.24E

1.

To determine

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Convertible bond

Convertible bonds are a kind of bonds that can be easily converted into common stock at the option of the issuer of the bond.

To Prepare: The journal entry to record the issuance of bonds by G (issuer) and purchases of bond investment by C.

1.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry to record the issuance of the bonds by G (issuer) as shown below:

Date Account titles and Explanation Debit Credit
January 1, 2016 Cash $12,120,000  
       Premium on bonds payable   $120,000
       Convertible bonds payable   $12,000,000
  (To record the issuance of the bonds)    

Table (1)

Working notes:

Calculation of the cash received amount as shown below:

Cash received=101%×Facevalue =101%×$12,000,000=$12,120,000

Hence, cash received amount is $12,120,000.

Calculation of the premium on bonds payable as shown below:

Premium on bonds payable=Cash receivedBonds payable=$12,120,000$12,000,000=$120,000

Hence, premium on bonds payable amount is $120,000.

  • Cash is a current asset, and increased. Therefore, debit cash account for $12,120,000.
  • Premium on bonds payable is an adjunct liability, and increased. Therefore, credit premium on bonds payable account for $120,000.
  • Convertible bonds payable is a long term liability, and increased. Therefore, credit convertible bonds payable account for $12,000,000.

Prepare the journal entry to record the purchases of the bonds by C (investor) as shown below:

Date Account titles and Explanation Debit Credit
January 1, 2016 Investment in convertible bonds $1,200,000  
  Premium on bonds payable $12,000  
       Cash   $1,212,000
  (To record the purchases of the bonds)    

Table (2)

Working notes:

Calculation of the amount of investment in convertible bonds as shown below:

Investment in convertible bonds=10%×Face value=10%×$12,000,000=$1,200,000

Hence, investment in convertible bonds amount is $1,200,000.

Calculation of the amount of cash paid as shown below:

Cash paid=101%×Investment in convertible bond=101%×$1,200,000=1,212,000

Hence, cash paid amount is $1,212,000.

Calculation of the premium on bonds investment as shown below:

Discount onbonds investment}=CashpaidInvestment in convertible bonds =$1,212,000$1,200,000=$12,000

Hence, premium of bonds investment is $12,000.

  • Investment in convertible bonds is non – current asset, and increased. Therefore, debit investment in convertible bonds account for $1,200,000.
  • Premium on bonds payable is an adjunct liability, and decreased. Therefore, debit premium on bonds payable account for $12,000.
  • Cash is a current asset, and decreased. Therefore, credit cash account for $1,212,000.

(2)

To determine

To Prepare: The journal entry to record the interest payment by both the Company G (Issuer), Company C (Investor) using the straight line method.

(2)

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry to record the interest payment by the Company G (issuer) as on 30th June 2020 shown below:

Date Account titles and Explanation Debit Credit
June 30, 2020 Interest expenses $534,000  
  Premium on bonds payable $6,000  
       Cash   $540,000
  (To record the payment of interest expenses)    

Table (3)

Working notes:

Calculation of the amount of cash paid for interest as shown below:

Cash paid=$12,000,000×9%×612=$540,000

Hence, cash paid amount is $540,000.

Calculation of the premium on bonds payable as shown below:

 Premium on bonds payable =Total bondpremium Number of premium=$120,00040=$6,000

Hence, premium on bonds payable amount is $56,000.

Calculation of the interest expense on the bond as shown below:

InterestExpense=Cash paidPremiumonbondpayable=$540,000$6,000=$534,000

Hence, interest expenses amount is $534,000.

  • Interest expenses are a component of stockholders’ equity, and decreased it. Therefore, debit interest expenses account for $534,000.
  • Premium on bonds payable is an adjunct liability, and decreased. Therefore, debit premium on bonds payable account for $56,000.
  • Cash is a current asset, and decreased. Therefore, credit cash account for $540,000.

Prepare the journal entry to record the interest payment by the Company C (Investor) as on 30th June 2020 shown below:

Date Account titles and Explanation Debit Credit
June 30, 2020 Cash $54,000  
       Premium on bonds payable   $600
       Interest revenue   $53,400
  (To record the receipt of interest revenue)    

Table (4)

Working notes:

Calculation of the amount of cash received for interest as shown below:

Cash received=$1,200,000×9%×612=$54,000

Hence, cash received amount is $54,000.

Calculation of the premium on bonds investment as shown below:

 Premium on bonds investment=Total bondinvestmentpremium Number of premium=$12,00020=$600

Hence, premium on bonds payable amount is $600.

Calculation of the interest revenue on the bond investment as shown below:

InterestRevenue=Cash receivedPremiumonbondinvestment=$54,000$600=$53,400

Hence, interest revenue amount is $534,000.

  • Cash is a current asset, and increased. Therefore, debit cash account for $54,000.
  • Premium on bonds payable is an adjunct liability, and increased. Therefore, credit premium on bonds payable account for $600.
  • Interest revenue is a component of stockholders’ equity, and increased it. Therefore, credit interest revenue account for $53,400.

(3)

To determine

To Prepare: The journal entry to record conversion of bonds from common stock for Company G (Issuer) and Company C (Issuer) as on 1st July 2021.

(3)

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry to record the conversion of bonds from common stock for Company G (Issuer) as on 1st July 2021 shown below:

Date Account titles and Explanation Debit Credit
July1, 2021 Convertible bonds payable 1,200,000  
  Premium on bonds payable   $5,400
       Common stock   $1,205,400
  (To record the conversion of bonds into common stock)    

Table (5)

Working notes:

Calculation of the amount of convertible bonds payable as shown below:

Convertible bonds payable=10%×$12,000,000=$1,200,000

Hence, convertible bonds payable amount is $1,200,000.

Calculation of the amount of premium on bond payable as shown below:

Premium on bonds payable=10%×($120,000 –($6,000×11))=10%×$54,000=$5,400

Hence, premium on bonds payable amount is $5,400.

Calculation of the value of common stock as shown below:

Common stock=Convertible bond payable+Premium on bond payable=$1,200,000+$5,400=$1,205,400

Hence, common stock amount is $1,205,400.

  • Convertible bonds payable is a long term liability, and decreased. Therefore, debit convertible bonds payable account for $1,200,000.
  • Premium on bonds payable is an adjunct liability, and increased. Therefore, credit premium on bonds payable account for $5,400.
  • Common stock is a component of stockholders’ equity, and increased it. Therefore, credit common stock account for $1,205,400.

Prepare the journal entry to record the conversion of bonds from common stock for Company C (Investor) as on 1st July 2021 shown below:

Date Account titles and Explanation Debit Credit
July1, 2021 Investment in common stock 1,205,400  
       Premium on bonds payable   $5,400
       Investment in convertible bonds   $1,200,000
  (To record the conversion of bonds into common stock)    

Table (6)

Working notes:

Calculation of the amount of premium on bond investment as shown below:

Premium on bonds investment=$12,000 –($600×11)=$5,400

Hence, premium on bond investments amount is $5,400.

Calculation of the investment in convertible bonds as shown below:

Investment in convertible bonds=(Investment in common stock – Premium on bonds investment)=$1,205,400$5,400=$1,200,000

Hence, investment in convertible bonds amount is $1,200,000.

  • Investment in common stock is a non – current asset, and increased. Therefore, debit investment in common stock account for $1,205,400.
  • Premium on bonds payable is an adjunct liability, and increased it. Therefore, credit premium on bonds payable account for $5,400.
  • Investment in convertible bonds is a long term liability, and increased. Therefore, credit investment in convertible bonds account for $1,200,000.

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Chapter 14 Solutions

INTERMEDIATE ACCOUNTING

Ch. 14 - When a notes stated rate of interest is...Ch. 14 - How does an installment note differ from a note...Ch. 14 - Prob. 14.13QCh. 14 - Prob. 14.14QCh. 14 - Air Supply issued 6 million of 9%, 10-year...Ch. 14 - Both convertible bonds and bonds issued with...Ch. 14 - Prob. 14.17QCh. 14 - Cordova Tools has bonds outstanding during a year...Ch. 14 - If a company prepares its financial statements...Ch. 14 - (Based on Appendix 14A) Why will bonds always sell...Ch. 14 - Prob. 14.21QCh. 14 - Prob. 14.22QCh. 14 - Prob. 14.23QCh. 14 - Bank loan; accrued interest LO132 On October 1,...Ch. 14 - Non-interest-bearing note; accrued interest LO132...Ch. 14 - Determining the price of bonds LO142 A company...Ch. 14 - Determining the price of bonds LO142 A company...Ch. 14 - Effective interest on bonds LO142 On January 1, a...Ch. 14 - Effective interest on bonds LO142 On January 1, a...Ch. 14 - Straight-line interest on bonds LO142 On January...Ch. 14 - Investment in bonds LO142 On January 1, a company...Ch. 14 - Prob. 14.9BECh. 14 - Note with unrealistic interest rate LO143 On...Ch. 14 - Installment note LO143 On January 1, a company...Ch. 14 - Prob. 14.12BECh. 14 - Bonds with detachable warrants LO145 Hoffman...Ch. 14 - Convertible bonds LO145 Hoffman Corporation...Ch. 14 - Prob. 14.15BECh. 14 - Prob. 14.1ECh. 14 - Prob. 14.2ECh. 14 - Prob. 14.3ECh. 14 - Prob. 14.4ECh. 14 - Prob. 14.5ECh. 14 - E 14–6 Bonds; issuance; effective...Ch. 14 - Prob. 14.7ECh. 14 - Prob. 14.8ECh. 14 - Prob. 14.9ECh. 14 - Prob. 14.10ECh. 14 - Prob. 14.11ECh. 14 - Prob. 14.12ECh. 14 - Prob. 14.13ECh. 14 - Prob. 14.14ECh. 14 - Prob. 14.15ECh. 14 - Prob. 14.16ECh. 14 - Prob. 14.17ECh. 14 - Prob. 14.18ECh. 14 - Prob. 14.19ECh. 14 - Prob. 14.20ECh. 14 - Prob. 14.21ECh. 14 - Prob. 14.22ECh. 14 - Prob. 14.23ECh. 14 - Prob. 14.24ECh. 14 - Prob. 14.25ECh. 14 - Prob. 14.26ECh. 14 - Prob. 14.27ECh. 14 - Prob. 14.28ECh. 14 - Prob. 14.29ECh. 14 - Prob. 14.30ECh. 14 - Prob. 14.31ECh. 14 - Prob. 14.32ECh. 14 - Prob. 14.33ECh. 14 - Prob. 14.34ECh. 14 - Prob. 14.35ECh. 14 - Prob. 14.36ECh. 14 - Prob. 1CPACh. 14 - Prob. 2CPACh. 14 - Prob. 3CPACh. 14 - Prob. 4CPACh. 14 - Prob. 5CPACh. 14 - Prob. 6CPACh. 14 - Prob. 7CPACh. 14 - Prob. 8CPACh. 14 - Prob. 9CPACh. 14 - Prob. 10CPACh. 14 - 11. On May 1, 2016, Maine Co. issued 10-year...Ch. 14 - Prob. 12CPACh. 14 - Prob. 1CMACh. 14 - Prob. 2CMACh. 14 - Prob. 3CMACh. 14 - Prob. 14.1PCh. 14 - Prob. 14.2PCh. 14 - Prob. 14.3PCh. 14 - Prob. 14.4PCh. 14 - Prob. 14.5PCh. 14 - Prob. 14.6PCh. 14 - Prob. 14.7PCh. 14 - Prob. 14.8PCh. 14 - Prob. 14.9PCh. 14 - Prob. 14.10PCh. 14 - Prob. 14.11PCh. 14 - Prob. 14.12PCh. 14 - Prob. 14.13PCh. 14 - Prob. 14.14PCh. 14 - Prob. 14.15PCh. 14 - Prob. 14.16PCh. 14 - Prob. 14.17PCh. 14 - Prob. 14.18PCh. 14 - Prob. 14.19PCh. 14 - Prob. 14.21PCh. 14 - Prob. 14.22PCh. 14 - Prob. 14.23PCh. 14 - Prob. 14.24PCh. 14 - Prob. 14.25PCh. 14 - Prob. 14.26PCh. 14 - Prob. 14.1BYPCh. 14 - Real World Case 142 Zero-coupon debt; HP Inc. ...Ch. 14 - Prob. 14.4BYPCh. 14 - Prob. 14.5BYPCh. 14 - Prob. 14.6BYPCh. 14 - Prob. 14.8BYPCh. 14 - Prob. 14.9BYPCh. 14 - Prob. 14.10BYPCh. 14 - Analysis Case 14–11 Bonds; conversion;...
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