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Chapter 14: Q6Q (page 752)

How should discounts on bonds payable be reported on the financial statements? Premium on bonds payable?

Short Answer

Expert verified

The discount or the premium on bonds payable that is yet to disbursed for interest expense will be listed promptly after the maturity amount of the bonds in the liabilities portion of the balance sheet.

Step by step solution

01

Meaning of Bonds Payable

Bonds payable is a liability account that comprises the amount that the issuer has to pay to the bondholders. It usually appears within the long-term liabilities portion of the balance sheet, as bonds payable generally mature after one year.

02

Reporting of discount or premium on bonds payable on the financial statements

The discount on bonds payable should be recorded in the balance sheet by directly subtracting it from the bond’s face value. However, the premium on bonds payable should be recorded by adding it to the maturity amount of the bond. Both are considered liability valuation accounts.

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Most popular questions from this chapter

(Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.

May 1, 2017 Bonds payable with a par value of \(900,000, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)

Jan. 1, 2018 Interest on the bonds is paid.

April 1 Bonds with par value of \)360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Instructions

(Round to two decimal places.)

Prepare journal entries for the transactions above.

Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 11% and has a carrying value of \(16,000. At year-end, Shonen Knife’s borrowing rate (credit risk) has declined; the fair value of the note payable is now \)17,500. (a) Determine the unrealized holding gain or loss on the note. (b) Prepare the entry to record any unrealized holding gain or loss.

Question: Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

  1. Prepare the journal entry on Gottlieb’s books for debt restructure.
  2. Prepare the journal entry on Ceballos’s books for debt restructure
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