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Chapter 14: Q6IFRS (page 772)

Assume the same information as in IFRS14-5, except that the bonds were issued at 84.95 to yield 12%. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and 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. The bonds are issued at a discount of$120,400.
  2. Discount of$776 was amortized on 1 July 2017.
  3. Interest expenses of$40,823 were reported on 31 Dec 2017.

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

Issuance of bonds

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Cash

$679,600

Discount on bond payable

$120,400

Bond payable

$800,000

03

Payment of interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$40,776

Discount on bond payable

$776

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 (6%)

Discount amortized

Unamortized Discount

Bond payable

Carrying value

1 Jan 2017

$120,400

$800,000

$679,600

1 July 2017

$40,000

$40,776

$776

$119,624

$800,000

$680,376

31 Dec 2017

$40,000

$40,823

$823

$118,801

$800,000

$681,199

04

 Accrual of interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Interest expenses

$40,823

Discount on bond payable

$823

Interest payable

$40,000

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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?

On December 31, 2017, Hyasaki Corporation has the following account balance:

Bonds payable, due January 1, 2026 \(2,000,000

Discount on bonds payable \) 88,000

Interest payable $ 80,000

Show how the above accounts should be presented on the December 31, 2017, balance sheet, including the proper classifications.

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.

(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.

What are some forms of off-balance-sheet financing?
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