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Chapter 12: Q35PGA_c (page 664)

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.

Short Answer

Expert verified

Interest expense debited by $40,000, premium on bonds debited by $2,250 and cash credited by $42,250.

Step by step solution

01

Definition of interest expense

Interest expense is the expense paid the by the company to the other party for using their funds.

02

Entry for the issue of bonds payable

Date

Particulars

Debit

Credit

December 31, 2018

Interest Expense

$40,000

Premium on bonds

$2,250

Cash

$42,250

(Being entry for the payment of interest)

Semi-Annual  Interest= Face Value× Interest  rate× time preiod12= $1,000,000× 8% × 612=$40,000

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Most popular questions from this chapter

Journalizing liability transactions and reporting them on the balance

sheet

The following transactions of Johnson Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires

payments due annually, on March 1. Each payment consists of \)30,000 principal

plus one year’s interest.

Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage

requires monthly payments of \)8,000. The interest rate on the note is 12% and

accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saputo Bank note.

31 Recorded interest accrued on the Coconut Creek Bank note.

2019

Jan. 1 Paid Saputo Bank monthly mortgage payment.

Feb. 1 Paid Saputo Bank monthly mortgage payment.

Mar. 1 Paid Saputo Bank monthly mortgage payment.

1 Paid first installment on note due to Coconut Creek Bank.

Requirements

1. Journalize the transactions in the Johnson Pharmacies general journal. Round to

the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on

March 1, 2019 after all the journal entries are recorded.

Analyzing, journalizing, and reporting bond transactions

Danny’s Hamburgers issued 6%, 10-year bonds payable at 90 on December 31, 2018.

At December 31, 2020, Danny reported the bonds payable as follows:

Long-term Liabilities:

Bonds Payable \( 600,000

Less: Discount on Bonds Payable (48,000) \) 552,000

Danny’s pays semiannual interest each June 30 and December 31.

Requirements

1. Answer the following questions about Danny’s bonds payable:

a. What is the maturity value of the bonds?

b. What is the carrying amount of the bonds at December 31, 2020?

c. What is the semiannual cash interest payment on the bonds?

d. How much interest expense should the company record each year?

2. Record the June 30, 2020, semiannual interest payment and amortization of

discount.

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.)

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable

at 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?

What is a bond payable?
See all solutions

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