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Chapter 14: Q5IFRS (page 772)

Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2017, at 119.792 to yield 8%. Interest is payable semi-annually on July 1 and January 1. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and the related amortization on July 1, 2017, and (c) the accrual of interest and the related amortization on December 31, 2017. (Round to the nearest dollar.)

Short Answer

Expert verified
  1. Premium on bond payable totals$158,336.
  2. Premium of$1,666 will be amortized on 1 July 2017.
  3. On December 31 2017 there was an accrual of interest expenses of$38,267.

Step by step solution

01

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

02

Journal entry for issuance of bonds

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Cash

$958,336

Bond payable

$800,000

Premium on bond payable

$158,336

03

Journal entry for interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$38,334

Premium on bond payable

$1,666

Cash

$40,000

Working note: Amortization table

Date

Cash interest at the stated rate on bond payable (5%)

Interest expenses at market rate on carrying value (4%)

Premium amortized

Unamortized premium

Bond payable

Carrying value

1 Jan 2017

$158,336

$800,000

$958,336

1 July 2017

$40,000

$38,334

$1,666

$156,670

$800,000

$956,670

31 Dec 2017

$40,000

$38,267

$1,733

$154,937

$800,000

$954,937

04

Accrual of interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Interest expenses

$38,267

Premium on bond payable

$1,733

Interest payable

$40,000

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Most popular questions from this chapter

(Amortization Schedule—Effective-Interest) Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)

Question: (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)

Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of \(330,000 plus \)33,000 of accrued interest. The note is due today, December 31, 2017. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, \(30,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of revised principal will continue to be due on 12/31 each year.

Assume the following present value factors for 3 periods.

Single sum

0.93543

0.93201

0.92589

0.92521

0.92184

0.91514

Ordinary annuity of 1

2.86989

2.86295

2.85602

2.84913

2.84226

2.82861

Instructions

(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately \)363,000 as the present value of the total future cash flows.)

(b) Prepare a schedule of debt reduction and interest expense for the years 2017 through 2020.

(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2017 through 2020.

(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2017, 2018, and 2019.

(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2017, 2018, and 2019.

Question: Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, debentures bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible bonds, commodity-backed bonds, and deep discount bonds.

Samson Corporation issued a 4-year, \(75,000, zero-interest-bearing note to Brown Company on January 1, 2017, and received cash of \)47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

(Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey arena at a cost of \(2,500,000. It received a downpayment of \)500,000 from local businesses to support the project, and now needs to borrow \(2,000,000 to complete the project. It therefore decides to issue \)2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

(b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method.

(c) Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.
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