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Chapter 12: Q25SE_1 (page 661)

Journalizing bond issuance and interest payments

On January 1, 2018, Roberts Unlimited issues 8%, 20-year bonds payable with aface value of $240,000. The bonds are issued at 104 and pay interest on June 30 andDecember 31.

Requirements

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

2. Journalize the semiannual interest payment and amortization of bond premium onJune 30, 2018.

3. Journalize the semiannual interest payment and amortization of bond premium onDecember 31, 2018.

4. Journalize the retirement of the bond at maturity, assuming the last interest paymenthas already been recorded. (Give the date).

Short Answer

Expert verified
  1. The cash account is debited with $249,600. The premium on the bonds payable account is credited with $9,600, and the bonds payable account is credited with $240,000.
  2. Interest expenses and premium on bonds payable debited by $9,600 and $240. The cash credited by $9,840.
  3. Interest expenses and premium on bonds payable debited by $9,600 and $240. The cash credited by $9,840
  4. Bonds payable debited by $240,000 and cash is credited by $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 issue of bond (1)

Date

Particulars

Debit

Credit

January 1, 2018

Cash

$249,600

Premium on Bonds Payable

$9,600

Bonds Payable

$240,000

(To record the issue of bonds)

Calculation of premium on bond:

PremiumonBond=IssuedPrice−ParValue=$249,600-$240,000=$9,600

03

Journal entry for the semi-annual interest and amortization of premium:

Date

Particulars

Debit

Credit

June 30, 2018

Interest Expense

$9,600

Premium on Bonds

$240

Cash

$9,840

(To record the payment of interest)

Coupon=ParValue×CouponRate×TimePeriod=$240,000×8%×612=$9,600

PremiumonBondAmortized=PremiumAmountSemi-annualPeriod=$9,60020×2=$240

04

Journal entry for the interest expense

Date

Particulars

Debit

Credit

December 31, 2018

Interest Expense

$9,600

Premium on Bonds

$240

Cash

$9,840

(To record the payment of interest)

05

Journal entry for the at bond maturity

Date

Particulars

Debit

Credit

Bonds payable

$240,000

Premium on Bonds

$240,000

(To record the redemption of bond)

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Most popular questions from this chapter

Accounting for long-term notes payable transactions

Consider the following note payable transactions of Caleb Video Productions.

2018

Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% note

payable. The note requires annual principal payments of \)16,000 plus

interest each October 1.

Dec. 31 Accrued interest on the note payable.

2019

Oct. 1 Paid the first installment on the note.

Dec. 31 Accrued interest on the note payable.

Requirements

1. Journalize the transactions for the company.

2. Considering the given transactions only, what are Caleb Video Productions’ total

liabilities on December 31, 2019?

Analyzing alternative plans to raise money

SB Electronics is considering two plans for raising \(4,000,000 to expand operations.

Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of common

stock. Before any new financing, SB Electronics has net income of \)350,000 and

300,000 shares of common stock outstanding. Management believes the company can

use the new funds to earn additional income of $700,000 before interest and taxes.

The income tax rate is 30%. Analyze the SB Electronics situation to determine which

plan will result in higher earnings per share. Use Exhibit 12-6 as a guide.

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell Company has extra cash and wishes to retire the bonds payable

on

January 1, 2019, immediately after making the second semiannual interest

payment. To

retire the bonds, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company’s carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company’s gain or loss on the retirement of the bonds

payable.

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?

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.
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