Horngren's Accounting (11th Edition)
Horngren's Accounting (11th Edition)
11th Edition
ISBN: 9780133856781
Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura
Publisher: PEARSON
Question
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Chapter 14, Problem 1QC
To determine

Notes:

  • They are long term negotiable instruments of debt issued by corporate entities to secure funds from the public. These funds are used to either fund long term capital expenditure or similar long-term investment opportunities.
  • They represent steady income for the investor in the form of periodic interest payments by the entity issuing the bond. Notes are issued at par, at premium or at a discount.
  • Journal entries are the first step in recording financial transactions and preparation of financial statements. These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.
  • Assets and expenses have debit balances and Liabilities and Incomes have credit balances.

Journal Entry for the annual payment of interest and principal on December 31, 2019.

Expert Solution & Answer
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Answer to Problem 1QC

Solution:

The correct answer is Option D.

Explanation of Solution

The Journal Entry for the annual payment of interest and principal on December 31, 2019 is as follows:

    Journal Entries
    DateParticularsDebit ($)Credit ($)
    31.12.2019Notes Payable80,000
    Interest on Notes40,000 
      To Cash 1,20,000
     (Being Annual interest and principal payment on 5% Notes made) 
  • Formula Used:

Interest = Face Value x Rate of Interest

  • Calculation:
Interest = $800,000 x 5% = $40,000
  • Notes Payable is a liability and must therefore have a credit balance. In order to reduce the balance due to principal repayment, it must be debited.
  • Interest will be calculated on face value of bond i.e. $800,000.
  • Interest on Notes A/c is an expense account and therefore has a debit balance. In order to create the expense account, it is debited.
  • Bank Account balance is an asset and is reduced at the time of payment of interest on Notes and hence must be credited to indicate decrease.
  • The interest is calculated on the difference of the Bond Repayable after deduction of principal repayment of $80,000.
Conclusion

Hence the correct option is Option D.

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Chapter 14 Solutions

Horngren's Accounting (11th Edition)

Ch. 14 - Prob. 1RQCh. 14 - Prob. 2RQCh. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 5RQCh. 14 - Prob. 6RQCh. 14 - Prob. 7RQCh. 14 - Prob. 8RQCh. 14 - Prob. 9RQCh. 14 - Prob. 10RQCh. 14 - Prob. 11RQCh. 14 - Prob. 12RQCh. 14 - 13. What type of account is Premium on Bonds...Ch. 14 - Prob. 14RQCh. 14 - Prob. 15RQCh. 14 - Prob. 16RQCh. 14 - What does the debt to equity ratio show, and how...Ch. 14 - Prob. 18ARQCh. 14 - Prob. 19ARQCh. 14 - Prob. 20ARQCh. 14 - Prob. 21BRQCh. 14 - Prob. S14.1SECh. 14 - Prob. S14.2SECh. 14 - Prob. S14.3SECh. 14 - Pricing bonds Bond prices depend on the market...Ch. 14 - Determining bond amounts Quick Drive-Ins borrowed...Ch. 14 - Journalizing bond transactions Piper Company...Ch. 14 - Journalizing bond transactions Ogden issued a...Ch. 14 - Journalizing bond transactions Watson Mutual...Ch. 14 - Journalizing bond transactions including...Ch. 14 - Retiring bonds payable before maturity On January...Ch. 14 - Preparing the liabilities section of the balance...Ch. 14 - Prob. S14.12SECh. 14 - Prob. S14A.13SECh. 14 - Determining the present value of bond at issuance...Ch. 14 - Using the effective-interest amortization method...Ch. 14 - Prob. S14B.16SECh. 14 - Accounting for long-term notes payable...Ch. 14 - Preparing an amortization schedule and recording...Ch. 14 - Analyzing alternative plans to raise money AF...Ch. 14 - Determining bond prices and interest expense Nooks...Ch. 14 - Journalizing bond issuance and interest payments...Ch. 14 - Journalizing bond issuance and interest payments...Ch. 14 - Prob. E14.23ECh. 14 - Journalizing bond issuance and interest payments...Ch. 14 - Retiring bonds payable before maturity Parkview...Ch. 14 - Prob. E14.26ECh. 14 - Prob. E14.27ECh. 14 - Prob. E14.28ECh. 14 - Prob. E14.29ECh. 14 - Prob. E14A.30ECh. 14 - A Journalizing liability transactions and...Ch. 14 - Analyzing, journalizing, and reporting bond...Ch. 14 - Analyzing and journalizing bond transactions On...Ch. 14 - Analyzing and journalizing bond transactions On...Ch. 14 - Prob. P14.35APGACh. 14 - Determining the present value of bonds payable and...Ch. 14 - Determining the present value of bands payable and...Ch. 14 - Journalizing liability transactions and reporting...Ch. 14 - Prob. P14.39BPGBCh. 14 - Prob. P14.40BPGBCh. 14 - Prob. P14.41BPGBCh. 14 - Prob. P14.42BPGBCh. 14 - Prob. P14.43BPGBCh. 14 - Prob. P14AB.44BPGBCh. 14 - Describing bonds and journalizing transactions for...Ch. 14 - Decision Case 14-1 The following questions are not...Ch. 14 - Ethical Issue 14-1 Raffle's Kids, a nonprofit...Ch. 14 - Prob. 14.1FCCh. 14 - Prob. 14.1FSC
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