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Chapter 12: Q6SE_2 (page 656)

Journalizing bond transactions

Power Company issued a $1,000,000, 5%, 5-year bond payable at face value on

January 1, 2018. Interest is paid semiannually on January 1 and July 1.

Requirements

1. Journalize the issuance of the bond payable on January 1, 2018.

2. Journalize the payment of semiannual interest on July 1, 2018.

Short Answer

Expert verified

Answer:

The interest expense account is debited with $25,000 and the cash account is

credited with $25,000.

Step by step solution

01

Definition of journal entry

Primary entry made by the accounting to record the financial transaction or event in

the books of accounts is journal entry.

02

Journal entry of the issue of bond

Date
Particulars
Debit
Credit
July 1, 2018
Interest Expense
$25,000


Cash

$25,000

(Being entry for the payment of

interest)



Interest=facevalueofbond×Interestrate×timeperiod=$1,000,000×5%×612=$25,000

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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.

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

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.

S12A-13 Determining present value

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

  1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Where is the current portion of notes payable reported on the balance sheet?
See all solutions

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