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Chapter 12: Q35PGA_d (page 664)

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Short Answer

Expert verified

The 8% bonds payable account is debited with $1,000,000, and the cash account is credited with $1,000,000.

Step by step solution

01

Definition of bonds payable

A bond payable is the long-term liability which shows the amount payable by the company to the other party.

02

Entry for the issue of bonds payable

Date

Particulars

Debit

Credit

December 31, 2037

8% Bonds Payable

$1,000,000

Cash

$1,000,000

(Being entry for the retirement of bonds)

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Most popular questions from this chapter

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Determining the present value of bonds payable

Interest rates determine the present value of future amounts. (Round to the nearest

dollar.)

Requirements

1. Determine the present value of 10-year bonds payable with face value of $86,000

and stated interest rate of 14%, paid semiannually. The market rate of interest is

14% at issuance.

2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.

3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodRelaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018,when the market interest rate is 12%, the company issues $300,000 of the bonds. Thebonds pay interest semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Reporting liabilities on the balance sheet and computing debt toequity ratio

The accounting records of Compass Wireless include the following as of December31, 2018:

Accounts Payable \( 74,000 Salaries Payable \) 7,500

Mortgages Payable (long-term) 80,000 Bonds Payable (current portion) 25,000

Interest Payable 21,000 Premium on Bonds Payable 13,000

Bonds Payable (long-term) 63,000 Unearned Revenue (short-term) 2,700

Total Stockholders鈥� Equity 145,000

Requirements

1. Report these liabilities on the Compass Wireless balance sheet, including headingsand totals for current liabilities and long-term liabilities.

2. Compute Compass Wireless鈥檚 debt to equity ratio at December 31, 2018.

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable

at 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?
See all solutions

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