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Chapter 12: Q7SE_1 (page 656)

S12-7 Journalizing bond transactions

Owen Company issued a $110,000, 11%, the 10-year bond payable at 94 onJanuary 1, 2018. Interest is paid semiannually on January 1 and July 1.

Requirements

1. Journalize the issuance of the bond payable on January 1, 2018.

2. Journalize the payment of semiannual interest and amortization of the bonddiscount or premium on July 1, 2018.

Short Answer

Expert verified
  1. The cash account and discount on bond are debited with $103,400 and $6,600. The bonds payable is credited with $110,000.
  2. Interest expense and discount on bond are debited by $6,050 and $330. The cash account credited by $6,380.

Step by step solution

01

Entry for the issue of bond

Date

Particulars

Debit

Credit

January 1, 2018

Cash

$103,400

Discount on bond

$6,600

11% Bonds Payable

$110,000

(Being Entry of the issue of bonds)

02

Calculation of cash received on issue of bond and discount on bond:

IssuePrice=ParValue脳$94100=$110,000脳$94100=$103,400

DiscountonBondsPayable=ParValue-IssuePrice=$110,000-$103,400=$6,600

03

Journal entry for the interest expense

Date

Particulars

Debit

Credit

July 1, 2018

Interest Expense

$6,050

Discount on Bonds Payable

$330

Cash

$6,380

(To record the payment of interest)

04

Calculation of interest expense:

CouponAmount=ParValue脳CouponRate脳TimePeriod=$110,000脳11%脳612=$6,050

DiscountAmortize=DiscountonBondsPayableSemi-annualPeriod=$6,60010脳2=$330

InterestExpenses=DiscountOnBondAmortized+CouponAmount=$330+$6,050=$6,380

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Most popular questions from this chapter

Bond prices depend on the market rate of interest, stated rate ofinterest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?Explain your answer.

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\(100 each. The bonds were dated 1873, beautifully engraved, showing a face value of

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prominently at the top and that the U.S. government had established a sinking fund to

retire the old railroad bonds. A sinking fund is a fund established for the purpose of

repaying the debt. It allows the organization (the U.S. government, in this example)

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hold on to them until the government contacted them, and they would eventually get

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they saw the exact same bonds for sale at a coin and stamp shop priced as 鈥渃ollectors鈥�

items鈥� for \)9.95 each!

Requirements

1. If a company goes bankrupt, what happens to the bonds it issued and the investorswho bought the bonds?

2. When investing in bonds, how can you tell whether the bond issue is a legitimatetransaction?

3. Is there a way to determine the relative risk of corporate bonds?

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.

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

What is an amortization schedule?
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