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Chapter 12: Q23E_1 (page 660)

Journalizing bond issuance and interest payments

On June 30, Daughtry Limited issues 8%, 20-year bonds payable with a face value of$130,000. The bonds are issued at 86 and pay interest on June 30 and December 31.

Requirements

1. Journalize the issuance of the bonds on June 30.

2. Journalize the semi-annual interest payment and amortization of bond discount on December 31.

Short Answer

Expert verified
  1. The cash account and discount on bonds payable are debited with $111,800, and $18,200.The bonds payable account is credited with $130,000.
  2. The interest expenses debited by $5,495. The discount on bonds payable and cash is credited by $295 and $5,200.

Step by step solution

01

Journal entry of the issue of bond

Date

Particulars

Debit

Credit

June 30

Cash

$111,800

Discount on Bonds Payable

$18,200

8% Bonds Payable

$130,000

(To record the issue of the bond)

02

Calculation of cash received on issue of bond and interest expenses:

IssuePrice=ParValue×$86100=$130,000×$92100=$111,800

DiscountonBondsPayable=ParValue-IssuePrice=$130,000-$111,800=$18,200

03

Payment of interest and amortization of discount

Date

Particulars

Debit

Credit

December 31

Interest Expense

$5,495

Discount on Bonds Payable

$295

Cash

$5,200

(To record the semi-annual payment and amortization of discount)

CouponAmount=ParValue×CouponRate×TimePeriod=$130,000×8%×612=$5,200

DiscountAmortize=DiscountonBondsPayableSemi-annualPeriod=$11,80020×2=$295

InterestExpenses=DiscountOnBondAmortized+CouponAmount=$295+$5,200=$5,495

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Most popular questions from this chapter

Weaver Corporation includes the following selected accounts in its general ledger on December 31, 2018:

Notes Payable (long-term) \( 75,000 Interest Payable (due next year) \) 720

Bonds Payable (long-term) 195,000 Sales Tax Payable 480

Accounts Payable 20,400 Premium on Bonds Payable 5,850

Salaries Payable 1,680 Estimated Warranty Payable 1,080

Prepare the liabilities section of Weaver Corporation’s balance sheet at December 31, 2018.

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Reporting liabilities on the balance sheet and computing debt toequity ratio

The accounting records of Compass Wireless include the following as of December31, 2018:

Accounts Payable \( 74,000 Salaries Payable \) 7,500

Mortgages Payable (long-term) 80,000 Bonds Payable (current portion) 25,000

Interest Payable 21,000 Premium on Bonds Payable 13,000

Bonds Payable (long-term) 63,000 Unearned Revenue (short-term) 2,700

Total Stockholders’ Equity 145,000

Requirements

1. Report these liabilities on the Compass Wireless balance sheet, including headingsand totals for current liabilities and long-term liabilities.

2. Compute Compass Wireless’s debt to equity ratio at December 31, 2018.

Reporting current and long-term liabilities

Pediatric Dispensary borrowed \(390,000 on January 2, 2018, by issuing a 15% serial

bond payable that must be paid in three equal annual installments plus interest for the

year. The first payment of principal and interest comes due January 2, 2019. Complete

the missing information. Assume the bonds are issued at face value.

December 31

2018 2019 2020

Current Liabilities:

Bonds Payable \) \( \)

Interest Payable

Long-term Liabilities:

Bonds Payable

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.
See all solutions

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