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Chapter 14: 3E (page 755)

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

Short Answer

Expert verified

The bond is issued at$200,000

(b) On July 1, interest is paid on 9% bonds is$4,500 and on 12% bonds is$6,000.

(c) On Dec 31, the accrued interest on 9% bonds payable is$4500and on 12% bonds payable is$6,000.

Step by step solution

01

Meaning of Journal Entry

The journal entry means the business's day-to-day transactions are recorded in the books of accounts at the end of the accounting period.

02

Preparation of journal entries for Company Simon

Simon Company

Journal entries

Date

Account and explanation

Debit ($)

Credit ($)

Jan 1, 2017

Cash

200,000

Bonds payable

200,000

(To bonds are issued)

July 1, 2017

Interest expense

4,500

Cash

4,500

(To interest expense paid)

Dec 31, 2017

Interest expenses

4,500

Interest payable

4,500

(To record interest payable)

03

Preparation of journal entries for Company Garfunkel

Garfunkel Company

Journal entries

Date

Account and explanation

Debit ($)

Credit ($)

Jan 1

Cash

105,000

Bonds payable

100,000

Interest expense

5,000

(To bonds are issued)

July 1

Interest expense

6,000

Cash

6,000

(To interest paid to the bond-holders)

Dec 31

Interest expenses

6,000

Interest payable

6,000

(To interest is payable on January 1, 2018, is recorded)

Working notes:

Calculation of quarterly interest

QuaterlyInterestperyear=$200,000脳9100脳14=$4500Perquarter

Calculation of interest on bond

Interestonbond=$100,000脳12100脳512=$5,000

Calculation of semi annual interest on bonds payable

Semi-annualInterest=$100,000脳12100脳612=$6,000

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Most popular questions from this chapter

On January 1, 2017, Ellen Carter Company makes the two following acquisitions.

  1. Purchases land having a fair value of \(200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of \)337,012.
  2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank

Instructions

(Round answers to the nearest cent.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.

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鈥檚 books for debt restructure.
  2. Prepare the journal entry on Ceballos鈥檚 books for debt restructure

What are the two methods of amortizing discount and premium on bonds payable? Explain each.

On January 1, 2017, JWS Corporation issued \(600,000 of 7% bonds, due in 10 years. The bonds were issued for \)559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company鈥檚 journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%

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