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Chapter 14: Q5BE (page 753)

Devers Corporation issued $400,000 of 6% bonds on May 1, 2017. The bonds were dated January 1, 2017, and mature January 1, 2020, with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers’s journal entries for (a) the May 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

Short Answer

Expert verified

The total for both the debit and credit sides is $432,000.

Step by step solution

01

Meaning of Face Value:

The amount of money the bond's issuer pays per bond to the bondholder at the maturity date is known as face value.It is generally denominated in the denomination of a hundred.

02

Journal Entries

Journal Entries

Date

No.

Accounts and Explanation

Debit

Credit

May 1, 2017

(a)

Cash

$408,000

Bonds Payable

$400,000

Interest Expenses

$8,000

July 1, 2017

(b)

Interest expenses

$12,000

Cash

$12,000

December 31, 2017

(c)

Interest expenses

$12,000

Interest Payable

$12,000

Working:

Interest expenses on May 1, 2017 =($400,000 x 6% x 4/12) = $8,000

Interest expenses paid cash on July 1, 2017 = ($400,000 x 6% x 1/12)= $12,000

Interest payable on December 31, 2017 = ($400,000 x 6% x 1/12) = $12,000

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Most popular questions from this chapter

Question: Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.

The following article appeared in the Wall Street Journal.

Bond Markets

Giant Commonwealth Edison Issue Hits Resale Market With \(70 Million Left Over

New york—Commonwealth Edison Co.’s slow-selling new 91 /4% bonds were tossed onto the resale market at a reduced price with about \)70 million still available from the \(200 million offered Thursday, dealers said.

The Chicago utility’s bonds, rated double-A by Moody’s and double-A-minus by Standard & Poor’s, originally had been priced at 99.803, to yield 9.3% in 5 years. They were marked down yesterday the equivalent of about \)5.50 for each $1,000 face amount, to about 99.25, where their yield jumped to 9.45%.

Instructions

  1. How will the development above affect the accounting for Commonwealth Edison’s bond issue?
  2. Provide several possible explanations for the markdown and the slow sale of Commonwealth Edison’s bonds.

What disclosures are required relative to long-term debt and sinking fund requirements?

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

Question: What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?
See all solutions

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