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Chapter 14: Q9Q (page 752)

Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?

Short Answer

Expert verified

The costs of issuing bonds should be listed as a deduction in the issuance value and are classified as an expense in the financial statements.

Step by step solution

01

Meaning of Financial Statements

Financial statements are the instruments of judging earning potential and managerial efficiency, which provides a comparison and assist in evaluating the company’s performance. Hence, these provide necessary inputs for predicting and other relevant decision-making purposes.

02

Accounting for bonds issuance costs and their classification in financial statements

The cost borne during the method of debt issuance is termed the unamortized debt issue cost. The costs incurred for issuing bonds should be reported as a decrease in the issuance value and then paid off as an expense over the duration of the bond.

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Most popular questions from this chapter

Question: Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.

What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

(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.

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.
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