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Chapter 12: Q42PGB (page 666)

Analyzing and journalizing bond transactions

On January 1, 2018, Electricians Credit Union (ECU) issued 8%, 20-year bondspayable with face value of $400,000. The bonds pay interest on June 30 andDecember 31. The issue price of the bonds is 104.

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 last interestpayment has already been recorded.

Short Answer

Expert verified

Cash debited by $416,000, 8% bond payable credited by $400,000 and premium on bond payable credited by $16,000.

Step by step solution

01

Definition of bonds payable

A bond is a type of long-term debt that large companies issue to fulfill cash requirements.

02

Entry for the issue of bonds payable

Date

Particulars

Debit

Credit

January 1, 2018

Cash

$416,000

8% Bonds Payable

$400,000

Premium on Bonds Payable

$16,000

(Being entry for the issue of bonds)

03

Payment of semi-annual interest and premium amortization

Date

Particulars

Debit

Credit

June 30, 2018

Interest Expense

$16,000

Premium on bonds

$400

Cash

$16,400

(Being entry for the payment of interest)

Semi-Annual  Interest= Face Value× Interest  rate× time preiod12= $400,000× 8% × 612=$16,000

04

Payment of semi-annual interest and premium amortization

Date

Particulars

Debit

Credit

December 31, 2018

Interest Expense

$16,000

Premium on bonds

$400

Cash

$16,400

(Being entry for the payment of interest)

Semi-Annual  Interest= Face Value× Interest  rate× time preiod12= $400,000× 8% × 612=$16,000

05

Maturity of the bonds

Date

Particulars

Debit

Credit

December 31, 2037

8% Bonds Payable

$400,000

Cash

$400,000

(Being entry for the retirement of bonds)

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Most popular questions from this chapter

Determining bond amounts

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

Analyzing and journalizing bond transactions

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payable

with face value of $600,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 7% when NCU issues its bonds, will the bonds be

priced at face value, at a premium, or at a discount? Explain.

2. If the market interest rate is 9% when NCU issues its bonds, will the bonds be

priced at face value, at a premium, or at a discount? Explain.

3. The issue price of the bonds is 92. 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 last

interest payment has already been recorded.

Preparing an amortization schedule and recording mortgages payable

entries

Kellerman Company purchased a building and land with a fair market value of

\(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman

signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of

\)3,940.37. Round to two decimal places. Explanations are not required for journal

entries.

Requirements

1. Journalize the mortgage payable issuance on January 1, 2018.

2. Prepare an amortization schedule for the first two payments.

3. Journalize the first payment on January 31, 2018.

4. Journalize the second payment on February 28, 2018.

Why would a company choose to issue bonds instead of issuing stock?

Reporting liabilities on the balance sheet and computing debt toequity ratio.The accounting records of Pack Leader Wireless include the following as ofDecember 31, 2018:

Accounts Payable \( 77,000 Salaries Payable \) 7,500

Mortgages Payable (long-term) 73,000 Bonds Payable (current portion) 25,000

Interest Payable 18,000 Premium on Bonds Payable 10,000

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

Total Stockholders’ Equity 140,000

Requirements

1. Report these liabilities on the Pack Leader Wireless balance sheet, includingheadings and totals for current liabilities and long-term liabilities.

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