Fundamental Accounting Principles
Fundamental Accounting Principles
23rd Edition
ISBN: 9781259536359
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 14, Problem 1E
To determine

Issue of bond at par:

When the coupon rate or contract rate of a bond is equal to the market interest rate, the bond is being issued at par value. If a bond is issued at par, the selling price of the bond will be equal to face value of the bond.

Issue of bond at discount:

When the coupon rate or contract rate of a bond is lower than the market interest rate, the bond is being issued at discount. The selling price of the bond will be lower than the face value of the bond under issue of bond at discount.

Issue of bond at premium:

When the coupon rate or contract rate of a bond is higher than the market interest rate, the bond is being issued at premium. If the bond is issued at premium, the selling price of the bond will be higher than the face value of the bond.

To determine:

1. Computation of the semiannual interest on the bonds payable.

2. Journalizing the (a) issuance of bonds on January 1, 2017; (b) the first interest payment on June 30, 2017; and (c) the second interest payment on December 31, 2017

3. Preparation of journal entry for issuance assuming the bonds are issued at (a) 98 and (b) 102.

Expert Solution & Answer
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Answer to Problem 1E

Solution:

1.

Boston Enterprise will pay an interest amount of $153,000 semiannually.

2.

Date General Journal Debit Credit
2015      
Jan. 1 Cash $3,400,000  
  Bonds Payable   $3,400,000
       
Jun. 30 Interest Expense $153,000  
  Cash   $153,000
       
Dec. 31 Interest Expense $153,000  
  Cash   $153,000

3.

Date General Journal Debit Credit
2015      
Jan. 1 Cash $3,332,000  
  Discount on Bonds Payable $68,000  
  Bonds Payable   $3,400,000
       
Jan. 1 Cash $3,468,000  
  Premium on Bonds Payable   $68,000
  Bonds Payable   $3,400,000

Explanation of Solution

Explanation:

1.

Computation of semiannual interest on Bonds Payable

Bonds Par Value   Semiannual Rate   Semiannual Interest Payment
$3,400,000 X 4.5% = $153,000

2.

When a bond is issued, cash is received by the issuer and the bonds payable becomes a liability for the issuer. So cash accounts is debited as the cash comes into the business and bond payable accounts credited as the it is liability which has to paid back on maturity.

Interest expense is an expense for the bond issuer, so when interest is paid on bonds payable, the interest expense accounts is debited as it is expense and the cash account is credited as the cash goes out of business.

3.

Bonds issued at discount:

Discount on bonds issued is an expense, so the when bonds are issued at discount, cash is debited excluding the discount, discount on bonds payable is debited being an expense and bonds payable accounts is credited as it is liability for the business unless it is paid.

Computation of discount on bonds issued.

Bonds Par Value   Issue Price in percent   Bonds Carrying Value
$3,400,000 X 98% = $3,332,000

Discount on Bonds Payable = Bonds Par Value  Bonds Issue​ Price                                             = $3,400,000  $3,332,000                                             = $68,000

Bonds issued at premium:

Premium on bonds is revenue, hence when bonds are issued on premium, cash is debited including the premium and premium on bonds payable account and bonds payable accounts are credited.

Computation of premium on bonds issued.

Bonds Par Value   Issue Price in percent   Bonds Carrying Value
$3,400,000 X 102% = $3,468,000

Premium on Bonds Payable = Bonds Par Value  Bonds Issue​ Price                                             = $3,400,000  $3,468,000                                             = $68,000

Conclusion

Bonds payable are usually issued in denomination $100, so if it is issued at $98 it means the issue is on discount of $2 and if it is issued at $102 it means the issue is on premium of $2.

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Chapter 14 Solutions

Fundamental Accounting Principles

Ch. 14 - Prob. 11DQCh. 14 - Prob. 12DQCh. 14 - Prob. 13DQCh. 14 - Prob. 14DQCh. 14 - Prob. 15DQCh. 14 - Prob. 16DQCh. 14 - Prob. 17DQCh. 14 - Prob. 18DQCh. 14 - Prob. 19DQCh. 14 - Prob. 20DQCh. 14 - Prob. 1QSCh. 14 - Prob. 2QSCh. 14 - Prob. 3QSCh. 14 - Prob. 4QSCh. 14 - Prob. 5QSCh. 14 - Prob. 6QSCh. 14 - Prob. 7QSCh. 14 - Prob. 8QSCh. 14 - Prob. 9QSCh. 14 - Prob. 10QSCh. 14 - Prob. 11QSCh. 14 - Prob. 12QSCh. 14 - Prob. 13QSCh. 14 - Prob. 14QSCh. 14 - Prob. 15QSCh. 14 - Prob. 16QSCh. 14 - Prob. 17QSCh. 14 - Prob. 18QSCh. 14 - Prob. 19QSCh. 14 - Prob. 20QSCh. 14 - Prob. 1ECh. 14 - Prob. 2ECh. 14 - Prob. 3ECh. 14 - Prob. 4ECh. 14 - Prob. 5ECh. 14 - Prob. 6ECh. 14 - Prob. 7ECh. 14 - Prob. 8ECh. 14 - Prob. 9ECh. 14 - Prob. 10ECh. 14 - Prob. 11ECh. 14 - Prob. 12ECh. 14 - Prob. 13ECh. 14 - Prob. 14ECh. 14 - Prob. 15ECh. 14 - Prob. 16ECh. 14 - Prob. 17ECh. 14 - Prob. 18ECh. 14 - Prob. 19ECh. 14 - Prob. 20ECh. 14 - Prob. 1APSACh. 14 - Prob. 2APSACh. 14 - Prob. 3APSACh. 14 - Prob. 4APSACh. 14 - Prob. 5APSACh. 14 - Prob. 6APSACh. 14 - Prob. 7APSACh. 14 - Prob. 8APSACh. 14 - Prob. 9APSACh. 14 - Prob. 10APSACh. 14 - Prob. 11APSACh. 14 - Prob. 1BPSBCh. 14 - Prob. 2BPSBCh. 14 - Prob. 3BPSBCh. 14 - Prob. 4BPSBCh. 14 - Prob. 5BPSBCh. 14 - Prob. 6BPSBCh. 14 - Prob. 7BPSBCh. 14 - Prob. 8BPSBCh. 14 - Prob. 9BPSBCh. 14 - Prob. 10BPSBCh. 14 - Problem 14-11EC Capital lease accounting C3 Braun...Ch. 14 - Prob. 14SPCh. 14 - Prob. 1BTNCh. 14 - Prob. 2BTNCh. 14 - Prob. 3BTNCh. 14 - Prob. 4BTNCh. 14 - Prob. 5BTNCh. 14 - Prob. 6BTNCh. 14 - Prob. 7BTNCh. 14 - Prob. 8BTNCh. 14 - Prob. 9BTN
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