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Chapter 12: Q8SE_1 (page 656)

Journalizing bond transactions

Wilkes Mutual Insurance Company issued a $100,000, 5%, 10-year bond payable at

111 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 and amortization of the bond

discount or premium on July 1, 2018.

Short Answer

Expert verified
  1. The cash account is debited with $111,000 and the 5% bonds payable account is credited with $111,000.
  2. The interest expense account is debited with $1,950, the premium on bonds payable account is debited with $550 and the cash account is credited with $2,500.

Step by step solution

01

Journal Entry for the issue of bond

Date

Particulars

Debit

Credit

January 1, 2018

Cash

$111,000

Premium on bonds payable

$11,000

5% Bonds Payable

$100,000

(Being Entry of the issue of bonds)

02

Calculation of premium on bonds payable:

IssuePrice=ParValue×$111100=$100,000×$103100=$111,000

PremiumonBondsPayable=IssuePrice-ParValue=$111,000-$100,000=$11,000

03

Journal Entry to record interest expenses:

Date

Particulars

Debit

Credit

July 1, 2018

Interest Expense

$1,950

Premium on Bonds Payable

$550

Cash

$2,500

(Being Entry of the payment of interest)

CouponAmount=ParValue×CouponRate×TimePeriod=$100,000×5%×612=$2,500

PremiumAmortize=PremiumonBondsPayableSemi-annualPeriod=$11,00010×2=$550

InterestExpenses=CouponAmount-PremiumonBondAmortized=$2,500-$550=$1,950

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Most popular questions from this chapter

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 6%, Benson Realty issues

\(700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson

Realty received \)713,234 in cash at issuance.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodRelaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018,when the market interest rate is 12%, the company issues $300,000 of the bonds. Thebonds 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.

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.

Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:

3. A 10% bonds payable is issued when the market interest rate is 8%.

4. A 10% bonds payable is issued when the market interest rate is 10%.

5. A 10% bonds payable is issued when the market interest rate is 12%.

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.
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