1-(a)
Journalize the entry for the issuance of bonds in the books of Corporation W.
1-(a)
Explanation of Solution
Bonds: Bonds are the financial debt instruments issued by the corporations to raise capital for the purposes of purchasing assets, or paying debts. Bonds are bought by individual investors, or corporations, or mutual funds, and receive a fixed interest revenue.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Journalize the entry for the issuance of bonds in the books of Corporation W.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
20-1 | ||||||
March | 1 | Cash | 257,500 | |||
Bonds Payable | 250,000 | |||||
Premium on Bonds Payable | 7,500 | |||||
(Record issuance of bonds at premium) |
Table (1)
Description:
- Cash is an asset account. The amount is increased because cash is received from the bond issue, and an increase in assets should be debited.
- Bonds Payable is a liability account. Since the liability to pay bonds has increased, liability increased, and an increase in liability is credited.
- Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Therefore, the respective liability account is increased, and an increase in liability is credited.
Working Notes:
Compute the amount of cash received.
Compute the amount of premium on bonds payable (unamortized premium).
Note: Refer to Equation (1) for value and computation of cash received.
(b)
Journalize the entry for the semiannual interest payment and premium amortization in the books of Corporation W.
(b)
Explanation of Solution
Journalize the entry for the semiannual interest payment and premium amortization in the books of Corporation W.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
20-1 | ||||||
August | 31 | Bond Interest Expense | 9,812.50 | |||
Premium on Bonds Payable | 187.50 | |||||
Cash | 10,000.00 | |||||
(Record payment of semiannual interest and the amortization of premium) |
Table (2)
Description:
- Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
- Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
- Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.
Working Notes:
Compute the cash paid.
Compute the amount of amortized premium.
Note: Refer to Equation (2) for value and computation of unamortized premium.
Compute the amount of bond interest expense.
Note: Refer to Equation (3) and (4) for both the values.
(c)
Journalize the entry for the year-end adjustment in the books of Corporation W.
(c)
Explanation of Solution
Journalize the entry for the year-end adjustment in the books of Corporation W.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
20-1 | ||||||
December | 31 | Bond Interest Expense | 6,541.67 | |||
Premium on Bonds Payable | 125.00 | |||||
Bond Interest Payable | 6,666.67 | |||||
(Record interest expense accrued) |
Table (3)
Description:
- Bond Interest Expense is an expense account. Since the interest is accrued, the interest expense increased. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
- Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
- Bond Interest Payable is a liability account. Since the liability to pay interest has increased, liability increased, and an increase in liability is credited.
Working Notes:
Compute the accrued bond interest payable amount.
Compute the amount of amortized premium.
Note: Refer to Equation (2) for value and computation of unamortized premium.
Compute the amount of bond interest expense.
Note: Refer to Equation (6) and (7) for both the values.
(d)
Journalize the entry to reverse the year-end adjustment in the books of Corporation W.
(d)
Explanation of Solution
Journalize the entry to reverse the year-end adjustment in the books of Corporation W.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
20-2 | ||||||
January | 1 | Bond Interest Payable | 6,666.67 | |||
Bond Interest Expense | 6,541.67 | |||||
Premium on Bonds Payable | 125.00 | |||||
(Record reversing entry for the accrued interest expense) |
Table (4)
Description:
- Bond Interest Payable is a liability account. Since the entry is reversed, liability which was credited earlier is debited now.
- Bond Interest Expense is an expense account. Since the entry is reversed, the stockholders’ equity which was debited earlier is credited now.
- Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the entry is reversed, the liability which was debited earlier is credited now.
Note: Refer to Equations (6), (7), and (8) for the computation of all the values.
(e)
Journalize the entry for the semiannual interest payment and premium amortization in the books of Corporation W.
(e)
Explanation of Solution
Journalize the entry for the semiannual interest payment and premium amortization on February 28.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
20-2 | ||||||
February | 28 | Bond Interest Expense | 9,812.50 | |||
Premium on Bonds Payable | 187.50 | |||||
Cash | 10,000.00 | |||||
(Record payment of semiannual interest and the amortization of premium) |
Table (5)
Description:
- Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
- Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
- Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.
Note: Refer to Equations (3), (4) and (5) for all the values.
Journalize the entry for the semiannual interest payment and premium amortization on August 31.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
20-2 | ||||||
August | 31 | Bond Interest Expense | 9,812.50 | |||
Premium on Bonds Payable | 187.50 | |||||
Cash | 10,000.00 | |||||
(Record payment of semiannual interest and the amortization of premium) |
Table (6)
Description:
- Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
- Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
- Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.
Note: Refer to Equations (3), (4) and (5) for all the values.
2.
Compute the amount of carrying value of the bonds on August 31, 20-2.
2.
Explanation of Solution
Carrying value: The carrying value of a bond is the sum of face value and the unamortized premium or the difference between the face value and the amortized discount. This is the value that is recorded on the balance sheet and is also referred to as book value.
Prepare a bond premium amortization schedule to compute the amount of carrying value of the bonds on August 31, 20-2.
Date |
Interest Expense Debit (1) |
Premium on Bonds Payable Debit (2) |
Cash Credit (3) |
Bonds Payable Balance (4) |
Premium on Bonds Payable (5) |
Carrying Value of Bonds (6) |
3/01/-1 | $250,000 | $7,500.00 | $257,500.00 | |||
8/31/-1 | $9.812.50 | $187.50 | $10,000 | 250,000 | 7,312.50 | 257,312.50 |
2/28/-2 | 9,812.50 | 187.50 | 10,000 | 250,000 | 7,125.00 | 257,125.00 |
8/31/-2 | 9,812.50 | 187.50 | 10,000 | 250,000 | 6,937.50 | $256,937.50 |
Table (7)
Note: Refer to Requirement (1) for the computation of all values.
Thus, the amount of carrying value of the bonds on August 31, 20-2 is $256,937.50.
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Chapter 22 Solutions
Study Guide With Working Papers For Heintz/parry's College Accounting, Chapters 1-15, 22nd
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