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Chapter 12: Q25E_4 (page 661)

Journalizing bond issuance and interest payments

On January 1, 2018, Roberts Unlimited issues 8%, 20-year bonds payable with a

face value of $240,000. The bonds are issued at 104 and pay interest on June 30 and

December 31.

Requirements

1. Journalize the issuance of the bonds on January 1, 2018.

2. Journalize the semiannual interest payment and amortization of bond premium on

June 30, 2018.

3. Journalize the semiannual interest payment and amortization of bond premium on

December 31, 2018.

4. Journalize the retirement of the bond at maturity, assuming the last interest payment

has already been recorded. (Give the date).

Short Answer

Expert verified

The bonds payable account is debited with $240,000, and the cash account is credited with $240,000.

Step by step solution

01

Definition of bonds issue on premium

When the bonds are issued greater than the market interest rate, then the bonds are known as the bond issue on premium.

02

Journal entry for the retirement

Date

Particulars

Debit

Credit

January 1, 2038

8% Bonds Payable

$240,000

Cash

$240,000

(To record the retirement of the bond)

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Most popular questions from this chapter

Bill and Edna had been married two years and had just reached the point where they

had enough savings to start investing. Bill’s uncle Dave told them that he had recently

inherited some very rare railroad bonds from his grandmother’s estate. He wanted

to help Bill and Edna get a start in the world and would sell them 50 of the bonds at

\(100 each. The bonds were dated 1873, beautifully engraved, showing a face value of

\)1,000 each. Uncle Dave pointed out that “United States of America” was printed

prominently at the top and that the U.S. government had established a sinking fund to

retire the old railroad bonds. A sinking fund is a fund established for the purpose of

repaying the debt. It allows the organization (the U.S. government, in this example)

to set aside money over time to retire the bonds. All Bill and Edna needed to do was

hold on to them until the government contacted them, and they would eventually get

the full \(1,000 for each bond. Bill and Edna were overjoyed—until a year later when

they saw the exact same bonds for sale at a coin and stamp shop priced as “collectors’

items” for \)9.95 each!

Requirements

1. If a company goes bankrupt, what happens to the bonds it issued and the investorswho bought the bonds?

2. When investing in bonds, how can you tell whether the bond issue is a legitimatetransaction?

3. Is there a way to determine the relative risk of corporate bonds?

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

Determining the present value of bonds payable and journalizing using the effective-interest amortization method

Sleep Well, Inc. is authorized to issue 9%, 10-year bonds payable. On January 1, 2018, when the market interest rate is 10%, the company issues $500,000 of the bonds. The bonds pay interest semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments. (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payment of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.

Determining the present value of bonds payable and journalizing

using the effective-interest amortization method

Brad Nelson, Inc. issued $600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, and the bonds pay interest

semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Journalizing bond transactions including retirement at maturity

McQueen Company issued a $100,000, 7.5%, 10-year bond payable. Journalize

the following

transactions for McQueen Company, and include an explanation for each

entry:

a. Issuance of the bond payable at face value on January 1, 2018.

b. Payment of semiannual cash interest on July 1, 2018.

c. Payment of the bond payable at maturity, assuming the last interest

payment had

already been recorded. (Give the date.)
See all solutions

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