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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries for issuing and calling bonds; gain

Emil Corp. produces and sells wind-energy-driven engines. To finance its operations, Emil Corp. issued $15,000,000 of 20-year, 9% callable bonds on May 1, 20Y1, at their face amount, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

20Y1  
May 1 Issued the bonds for cash at their face amount.
Nov. 1 Paid the interest on the bonds.
20Y5  
Nov. 1 Called the bond issue at 96, the rate provided in the bond indenture. (Omit entry for payment of interest.)

To determine

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.

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.

To prepare:

  • Journal entry to record issuance of the bonds for cash at face amount.
  • Journal entry to record the payment of interest on the bonds on November 1.
  • The redemption of the bonds.
Explanation

Prepare journal entry for issuance of bonds at face amount on May 1.

Date Accounts and Explanation Post Ref Debit ($) Credit ($)
May 1, 20Y1 Cash 15,000,000
Bonds Payable 15,000,000
(To record the issuance of bonds payable at face value)

Table (1)

  • Cash is an asset and it is increased. So, debit it by $15,000,000.
  • Bonds payable is a liability and it is increased. So, credit it by $15,000,000.

Prepare journal entry for interest payment on November 1.

Date Accounts and Explanation Post Ref Debit ($) Credit ($)
November 1, 20Y1 Interest Expense (1) 675,000
Cash 675,000
(To record the payment of semiannual interest)

Table (2)

Working note:

Interest expense = Bonds payable×interest rate×Time periods                          = $15,000,000×9%×612                          = $675,000 (1)

  • Interest expense is an expense and it decreases the equity value. So, debit it by $675,000

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