(1)
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.
Straight-line amortization bond
To Determine: The price of the bonds for Incorporation UF as on 1st January 2018.
(1)
Explanation of Solution
Calculation of price of the bonds for the Incorporation UF as on 1st January 2018 as shown below:
Therefore, price of the bonds for the Incorporation UF as on 1st January 2018 is $129,352,725.
Working notes:
Calculation of present value of interest payments of Incorporation UF as shown below:
Particulars | Amount ($) |
Interest payments amount (a) | $7,500,000 |
PV factor at an annual market rate of 6% for 20 periods (b) | |
Present value of interest payments
|
$103,236,225 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 30 periods at 6% is 13.76483 (refer Table 4 in Appendix).
Hence, present value of interest payment of Incorporation UF is $103,236,225.
Calculation of present value of principal of Incorporation UF as shown below:
Particulars | Amount ($) |
Face |
$150,000,000 |
PV factor at an annual market rate of 6% for 20 periods (b) | |
Present value of face value of the bonds
|
$26,116,500 |
Table (2)
Note: The present value of $1 for 20 periods at 6% is 0.17411 (refer Table 2 in Appendix).
Hence, present value of principal amount of Incorporation UF is $26,116,500.
Calculation of the amount of interest payment as shown below:
Hence, the interest payment amount is $7,500,000.
The price of the bond is calculated by adding present value of principal and present value of interest payments. Therefore, price of the bonds for Incorporation UF is $103,236,
(2)
To Prepare: The
(2)
Explanation of Solution
Record the journal entry to issuance of the bonds for Incorporation UF as son 1st January 2018 as shown below:
Record the journal entry for issuance of bonds on January 1, 2016:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2016 | Cash | 129,352,725 | ||
January | 1 | |||
Discount on Bonds Payable | 20,647,275 | |||
Bonds Payable | 150,000,000 | |||
(To record the issue of bonds for Incorporation UF) |
Table (3)
Working note:
Calculation of the discount on bonds payable as shown below:
Hence, discount on bonds payable amount is $20,647,275.
- Cash is an asset and it increases by $129,352,725. Therefore, debit cash account by $129,352,725.
- Discount on bonds payable is a contra liability and it decreases by $20,647,275. Therefore, debit discount on bonds payable account by $20,647,275.
- Bonds payable is a long-term liability and it increases by $150,000,000. Therefore, credit bonds payable account by $150,000,000.
(3)
To Prepare: The journal entry to record interest expenses as on June 30, 2018.
(3)
Explanation of Solution
Record the journal entry for payment of semiannual interest and amortization of discount on bonds issued on June 30, 2018:
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2018 | Interest Expense | 8,188,243 | |||||
June | 30 | Discount on Bonds Payable | 688,243 | ||||
Cash | 7,500,000 | ||||||
(To record payment of semi-annual interest expenses) |
Table (4)
Working notes:
Determine the amount of amortization of bond discount as shown below:
Hence, the discount amortization of bond amount is $688,243.
Calculation of the amount of interest as on June 30, 2018 as shown below:
Hence, interest payable (cash paid) amount is $7,500,000.
Calculation of the interest expense on the bond as on June 30, 2018 as shown below:.
Hence, interest expenses amount is $8,188,243.
- Interest Expense is a component of
stockholders’ equity , and decreased it. Therefore, debit interest expense account by $8,188,243. - Discount on bonds payable is a contra liability and it increases by $688,243. Therefore, credit discount on bonds payable account by $688,243.
- Cash is an asset and it decreases by $7,500,000. Therefore, credit cash account by $7,500,000.
(4)
To Prepare: The journal entry to record interest expense on December 31, 2025.
(4)
Explanation of Solution
Record the journal entry for payment of semiannual interest and amortization of discount on bonds issued on December 31, 2025:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2025 | Interest Expense | 8,188,243 | ||||
December | 31 | Discount on Bonds Payable | 688,243 | |||
Cash | 7,500,000 | |||||
(To record payment of semi-annual interest) |
Table (5)
Working notes:
Determine the amount of amortization of bond discount as shown below:
Hence, amortization of discount on bond amount is $688,243.
Calculation of the amount of interest as on December 31, 2025 as shown below:
Calculation of the interest expense on the bond as on December 31, 2025 as shown below:
Hence, interest expense amount is $8,188,243.
- Interest Expense is an expense and it decreases the value of equity. Therefore, debit interest expense account by $8,188,243.
- Discount on bonds payable is a contra liability and it increases by $688,243. Therefore, credit discount on bonds payable account by $688,243.
- Cash is an asset and it decreases by $7,500,000. Therefore, credit cash account by $7,500,000
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Chapter 14 Solutions
INTERMEDIATE ACCT VOL.2>CUSTOM<
- (Appendix 13.1) Derivatives Danburg. Company has a 5 million, 9% bank loan outstanding with its local bank. On January 1, 2019, when the loan has 4 years remaining, Danburg contracts with Bradford Investment Bank to enter into a 4-year interest-rate swap with a 5 million notional amount. Danburg agrees to receive from Bradford a fixed interest rate of 9% and to pay Bradford an interest amount each year that is variable based on the LIBOR interest rate at the beginning of the year. The interest payments are made at year-end. The applicable interest rate on the swap is reset each year after the annual interest payment is made. The LIBOR interest rate is 8.6% and 9.5% at the beginning of 2019 and 2020, respectively. The 3-year fixed interest rate is 10% at December 31, 2019, and the 2 year rate is 8% at December 31, 2020. Required: 1. Prepare the journal entries of Danburg for the bank loan and derivative for 2019 and 2020. Round calculations to the nearest dollar. 2. Prepare the appropriate disclosures in Danburgs financial statements for 2019 and 2020.arrow_forwardCurrent position analysis The bond indenture for the 10-year, 9% debenture bonds issued January 2, 20Y5, required working capital of 100,000, a current ratio of 1.5, and a quick ratio of 1.0 at the end of each calendar year until the bonds mature. At December 31, 20Y6, the three measures were computed as follows: 1. Current assets: Cash...................................... 102,000 Temporary investments.................... 48,000 Accounts and notes receivable (net)......... 120,000 Inventories................................ 36,000 Prepaid expenses.......................... 24,000 Intangible assets.......................... 124,800 Property, plant, and equipment............. 55,200 Total current assets (net)................ 510,000 Current liabilities: Accounts and short-term notes payable..... 96,000 Accrued liabilities.......................... 204,000 Total current liabilities.................. 300,000 Working capital............................. 210,000 2. Current ratio................................ 1.7 510,000 300,000 3. Quick ratio.............................................. 1.2 115,200 96,000 a. List the errors in the determination of the three measures of current position analysis. b. Is the company satisfying the terms of the bond indenture? Explain.arrow_forwardsh2 Universal Foods issued 8% bonds, dated January 1, with a face amount of $160 million on January 1, 2024. The bonds mature on December 31, 2038 (15 years). The market rate of interest for similar issues was 10%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. Required: 1. Determine the price of the bonds at January 1, 2024. 2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2024, interest on June 30, 2024 and interest on December 31, 2031.arrow_forward
- P 16 On 1/10/2019 ABC company issued a $120,000, 12%, 4 years bonds. The bonds pay interest quarterly on 1/1 , 1/4,1/7 , and 1/10. The bonds were issued for 136,293.25, since the market rate was equal 8%. On 1/5 / 2021 the company called 75% of its outstanding at 102² Required: Based on the above given information, answer the following question: (a) What is the amount of interest expense that must be presented on ABC" Company income statement for the year ended December, 31, 2019? (b) What is the bond's carrying value that must be presented on the statement of financial position as on December, 31, 2020? (c) Prepare ALL the required journal entries for the year 2021.arrow_forwardMf2. On January 1, 2022. Sarasota Company purchased 12% bonds having a maturity value of $430,000 for $462,600.36. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2022, and mature January 1, 2027, with interest receivable December 31 of each year. Sarasota elected the fair value option for this held-for-collection investment. Prepare any entry necessary at December 31, 2022, assuming the fair value of the bonds is $464,400. (Round answers to 2 decimal places, e.g. 5,275.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.)arrow_forwardEA6. LO 13.2 Oak Branch Inc. issued $700,000 of 5%, 10-year bonds when the market rate was 4%. They received $757,243. Interest was paid semi-annually. Prepare an amortization table for the first three years of the bonds. Cash Interest Payment Rate 0.025 Interest on Carrying Value Rate 0.02 Amortization of Premium Carrying Value Jan. 1, Year 1 757,243 June 30, Year 1 Dec. 31, Year 1 June 30, Year 2 Dec. 31, Year 2 June 30, Year 3 Dec. 31, Year 3arrow_forward
- Kk.371. Bonds Issued at a Discount (Effective Interest) Sicily Corporation issued $1,250,000 in 7% bonds (payable on December 31, 2032) on December 31, 2022, for $1,125,000. Interest is paid on June 30 and December 31. The market rate of interest is 9%. Required: Prepare the amortization table through December 31, 2024, using the effective interest rate method. If required, round your answers to the nearest dollar.arrow_forwardQ 11 On January 1, 20x8, James Corporation issued $500,000, 10%, 5-year bonds, at 98. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end. The journal entry on July 1, 20x8 would include which of the following? Select one: a. Debit to Bond Interest Expense for $26,000 b. Debit to Bond Interest Expense for $25,000 c. Credit to cash for $26,000 d. None of the abovearrow_forwardP 10–6 A 3‐year $1,000,000, 10% bond issue was authorized for Mega Corporation on April 1, 2019. Interest is payable on March 31 and September 30. The year‐end of the Corporation is December 31. Required: Consider the following independent cases: 1. The Mega Corporation issued the bonds on April 1, 2019, at 97. Prepare the journal entries required on April 1, 2019, September 30, 2019, and December 31, 2019. Assume straight‐line amortization. 2. The bonds are issued at 106 on April 1, 2019. Prepare the journal entries to record the sale of the bonds on April 1, 2019, and entries required on September 30, 2019, and December 31, 2019 3. The bonds are not issuedarrow_forward
- M 10 Selected transactions on the books of Sheridan Corporation follow:May 1, 2023 Bonds payable with a par value of $720,000, dated January 1, 2023, are sold at 109 plus accrued interest.They are coupon bonds, bear interest at 11% (payable annually at January 1), and mature on January 1, 2033. (Use int exp as accrued) Dec. 31Adjusting entries are made to record the accrued interest on the bonds and the amortization of the proper amount of premium (use the straight-line method) Jan. 1, 2024Interest on the bonds is paid. April 1Par value bonds of $360,000 are repurchased at 105 plus accrued interest and are retired. (Bond premium is to be amortized only at the year-end, Dec. 31Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortize(a) Assume that Sheridan follows ASPE. Prepare the journal entries for the transactions above. (Round answers to 0 decimal placesarrow_forwardPB6. LO 13.3Edward Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $480,000. Interest is payable semiannually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions. July 1, 2018: entry to record issuing the bonds Dec. 31, 2018: entry to record payment of interest to bondholders Dec. 31, 2018: entry to record amortization of discountarrow_forwardE13.8 (LO 2) (Refinancing of Short-Term Debt) On December 31, 2020, McDaniel Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2021. On January 21, 2021, the company issued 25,000 shares of its common stock for $38 per share, receiving $950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2021, the proceeds from the stock sale, supplemented by an additional $250,000 cash, are used to liquidate the $1,200,000 debt. The December 31, 2020, balance sheet is issued on February 23, 2021.InstructionsShow how the $1,200,000 of short-term debt should be presented on the December 31, 2020, balance sheet, including note disclosure.arrow_forward
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