1.
Prepare
1.
Explanation of Solution
Bonds:
Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Prepare journal entry to record the issuance of the bonds as on 1st November 2019.
Date | Account titles and Explanation | Debit | Credit |
November 1, 2019 | Cash (1) | $103,000 | |
Premium on bonds payable (balancing figure) | $3,000 | ||
Bonds payable | $100,000 | ||
(To record issuance of bonds) |
Table (1)
- Cash is a current asset, and it is increased. Therefore, debit cash account for $103,000.
- Premium on bonds payable is an adjunct liability, and it is increased. Therefore, credit premium on bonds payable account for $3,000.
- Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $100,000.
Working note:
(1)Calculate cash proceeds.
2.
Prepare journal entries to record the interest expense during the year 2020.
2.
Explanation of Solution
Prepare journal entry to record interest expense as on 1st May 2020.
Date | Account titles and Explanation | Debit | Credit |
May 1, 2020 | Interest expense (balancing figure) | $4,850 | |
Premium on bonds payable (3) | $150 | ||
Cash (2) | $5,000 | ||
(To record interest expense) |
Table (2)
- Interest expense is a component of
stockholders’ equity , and it increase expense accounts. Therefore, debit interest expense account for $4,850. - Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $150.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $5,000.
Working notes:
(2)Calculate cash paid.
(3)Calculate premium on bonds payable.
Prepare journal entry to record interest expense as on 1st November 2020.
Date | Account titles and Explanation | Debit | Credit |
November 1, 2020 | Interest expense (balancing figure) | $4,850 | |
Premium on bonds payable (5) | $150 | ||
Cash (4) | $5,000 | ||
(To record interest expense) |
Table (3)
- Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $4,850.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $150.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $5,000.
Working notes:
(4)Calculate cash paid.
(5)Calculate premium on bonds payable.
Prepare journal entry to record
Date | Account titles and Explanation | Debit | Credit |
December 31, 2020 | Interest expense (balancing figure) | $1,616.67 | |
Premium on bonds payable (7) | $50 | ||
Interest payable (6) | $1,666.67 | ||
(To record adjusting entry for accrued interest) |
Table (4)
- Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $1,616.67.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $50.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $1,666.67.
Working notes:
(6)Calculate interest payable.
(7)Calculate premium on bonds payable.
3.
Prepare journal entry to record the retirement of $20,000 of the bonds on 1st February 2021.
3.
Explanation of Solution
Prepare journal entry to record reversing entry for accured interest as on 1st February 2021.
Date | Account titles and Explanation | Debit | Credit |
February 1, 2021 | Interest expense (balancing figure) | $485.00 | |
Premium on bonds payable (9) | $15 | ||
Interest payable (8) | $500.00 | ||
(To record adjusting entry for accrued interest) |
Table (5)
- Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $485.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $15.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $500.
Working notes:
(8)Calculate interest payable.
(9)Calculate premium on bonds payable.
Prepare journal entry to record retirement of bonds as on 1st February 2021.
Date | Account titles and Explanation | Debit | Credit |
February 1, 2021 | Bonds payable | $20,000 | |
Premium on bonds payable (10) | $525 | ||
Interest payable (8) | $500 | ||
Cash (11) | $20,100 | ||
Gain on retirement of bonds (balancing figure) | $925 | ||
(To record retirement of bonds) |
Table (6)
- Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $20,000.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $525.
- Interest payable is a current liability, and it is decreased. Therefore, debit interest payable account for $500.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $20,100.
- Gain on retirement of bonds is a component of stockholders’ equity, and it increases revenue accounts. Therefore, credit gain on retirement of bonds account for $925.
Working notes:
(10)Calculate premium on bonds payable.
(11)Calculate cash.
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Chapter 14 Solutions
Intermediate Accounting: Reporting And Analysis
- On January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?arrow_forwardDisclosure of Debt On May 1, 2019, Ramden Company issues 13% bonds with a face value of 2 million. The bond contract calls for retirement of the bonds in periodic installments of 200,000, starting on May 1, 2020, and continuing on each May 1 thereafter until all bonds are retired. Required: How would the preceding information appear in Ramdens balance sheets on December 31, 2019, and 2020?arrow_forwardRefer to the information in RE13-5. Assume that on December 31, 2019, the investment in Smith Corporation bonds has a market value of 12,500. Prepare the year-end journal entry to record the unrealized gain or loss.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning