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Chapter 14: 3E (page 755)

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

Short Answer

Expert verified

The bond is issued at$200,000

(b) On July 1, interest is paid on 9% bonds is$4,500 and on 12% bonds is$6,000.

(c) On Dec 31, the accrued interest on 9% bonds payable is$4500and on 12% bonds payable is$6,000.

Step by step solution

01

Meaning of Journal Entry

The journal entry means the business's day-to-day transactions are recorded in the books of accounts at the end of the accounting period.

02

Preparation of journal entries for Company Simon

Simon Company

Journal entries

Date

Account and explanation

Debit ($)

Credit ($)

Jan 1, 2017

Cash

200,000

Bonds payable

200,000

(To bonds are issued)

July 1, 2017

Interest expense

4,500

Cash

4,500

(To interest expense paid)

Dec 31, 2017

Interest expenses

4,500

Interest payable

4,500

(To record interest payable)

03

Preparation of journal entries for Company Garfunkel

Garfunkel Company

Journal entries

Date

Account and explanation

Debit ($)

Credit ($)

Jan 1

Cash

105,000

Bonds payable

100,000

Interest expense

5,000

(To bonds are issued)

July 1

Interest expense

6,000

Cash

6,000

(To interest paid to the bond-holders)

Dec 31

Interest expenses

6,000

Interest payable

6,000

(To interest is payable on January 1, 2018, is recorded)

Working notes:

Calculation of quarterly interest

QuaterlyInterestperyear=$200,000×9100×14=$4500Perquarter

Calculation of interest on bond

Interestonbond=$100,000×12100×512=$5,000

Calculation of semi annual interest on bonds payable

Semi-annualInterest=$100,000×12100×612=$6,000

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Most popular questions from this chapter

Under what conditions of bond issuance do a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?

Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk.

Carrying Value

Fair Value

December 31, 2017

\(54,000

\)54,000

December 31, 2018

44,000

42,500

December 31, 2019

36,000

38,000

Instructions

(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2017, 2018, and 2019, to record the fair value option for these notes.

(b) At what amount will the note be reported on Fallen’s 2018 balance sheet?

(c) What is the effect of recording the fair value option on these notes on Fallen’s 2019 income?

(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2019? Explain.

On January 2, 2012, Banno Corporation issued \(1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Banno called \)900,000 face amount of the bonds and redeemed them.

Instructions

Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.

BE14-2 (L01) The Colson Company issued $300,000 of 10% bonds on January 1, 2017. The bonds are due January 1, 2022, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

E14-2 (L01) (Classification) The following items are found in the financial statements.

(a) Discount on bonds payable.

(b) Interest expense (credit balance).

(c) Unamortized bond issue costs.

(d) Gain on repurchase of debt.

(e) Mortgage payable (payable in equal amounts over next 3 years).

(f) Debenture bonds payable (maturing in 5 years).

(g) Notes payable (due in 4 years).

(h) Premium on bonds payable.

(i) Bonds payable (due in 3 years).

Instructions

Indicate how each of these items should be classified in the financial statements.
See all solutions

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