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Chapter 14: Q2P (page 760)

(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.

Short Answer

Expert verified
  1. Journal entry record debit to cash, credit to bonds payable, and premium on bond payable.
  2. The bond's book value payable on 1 January 2020 is $2,043,559.
  3. The business entity will incur a loss of $41,938on redemption.

Step by step solution

01

Definition of Interest Payable

Interest payable can be defined as the interest expenses that are incurred by the business entity but are not paid to the creditor. These are reported under current liabilities by the business entity

02

Journal entry for the issuance

Date

Accounts and Explanation

Debit ($)

Credit ($)

1 Jan 2016

Cash

2,061,450

Bonds payable

2,000,000

Premium on bonds payable

61,450

Working note:

Particular

Amount $

Present value of bonds ($2,000,000脳11+0.1010)

$771,000

Present value of interest payment

($2,000,000脳10.5%脳1-11+0.10100.10)

$1,290,450

Present value

$2,061,450

03

Bond amortization schedule

Date

Interest payment at the stated rate on face value (10.5%)

Interest expenses at the market rate on the previous year book value (10%)

Amortized premium

Unamortized premium

Bond payable

Book value of bond payable

1 Jan 2016

$61,450

$2,000,000

$2,061,450

1 Jan 2017

$210,000

$206,145

$3,855

57,595

2,000,000

2,057,595

1 Jan 2018

210,000

205,759.5

4,240.5

53,354.5

2,000,000

2,053,354.5

1 Jan 2019

210,000

205,335.45

4,664.55

48,689.95

2,000,000

2,048,689.95

1 Jan 2020

210,000

204,868.995

5,131.005

43,558.945

2,000,000

2,043,558.945

04

Journal entry to record the redemption

Date

Accounts and Explanation

Debit ($)

Credit ($)

Entry for accrual

Interest expenses

51,217

Premium on bond payable

($5131.005脳12脳12)

1,283

Interest payable

($210,000脳12脳12)

52,500

Entry for reacquisition

Bond payable

1,000,000

Premium on bond payable

23,062

Loss on redemption

41,938

Cash

1,065,000

Working note:

Calculation of loss on redemption:

Particular

Amount $

Carrying amount of 1 Jan 2019

$2,048,689.95

Less: amortization of bond up to June 2019($5131.0052)

(2,565.5025)

Carrying amount on 1 July 2019

$2,046,124.4475

Half of bonds retired($2,046,124.44752)

$1,023,062.22

Calculation of gain or loss on redemption:

Particular

Amount $

Reacquisition price

$1,065,000

Less: Carrying value

($1,023,062.22)

Loss on redemption

($41,937.77)

Calculation of premium written off:

Particular

Amount $

Carrying value on 1 July 2019

$2,046,124.4475

Less: Par value

(2,000,000)

$46,124.4475

For 6months

$23,062.22

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Most popular questions from this chapter

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a 鈥渄ebtor in possession,鈥� he has negotiated the following revised loan agreement with United Bank. Perkins Inc.鈥檚 \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2017, at 119.792 to yield 8%. Interest is payable semi-annually on July 1 and January 1. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and the related amortization on July 1, 2017, and (c) the accrual of interest and the related amortization on December 31, 2017. (Round to the nearest dollar.)

All of the following are differences between IFRS and GAAP in accounting for liabilities except:

a) When a bond is issued at a discount, GAAP records the discount in a separate contra liability account. IFRS records the bond net of the discount.

b) Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond.

c) GAAP, but not IFRS, uses the term 鈥渢roubled-debt restructurings.鈥�

d) GAAP, but not IFRS, uses the term 鈥減rovisions鈥� for contingent liabilities which are accrued.

The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2011, and the subsequent interest payments and charges. The company鈥檚 year-end is December 31, and financial statements are prepared once yearly.

Amortization Schedule

Year

Cash

Interest

Amount unamortized

Carrying value

1/1/2011

\(5,651

\)94,349

2011

\(11,000

\)11,322

5,329

94,671

2012

11,000

11,361

4,968

95,032

2013

11,000

11,404

4,564

95,436

2014

11,000

11,452

4,112

95,888

2015

11,000

11,507

3,605

95,395

2016

11,000

11,567

3,038

96,962

2017

11,000

11,635

2,403

97,597

2018

11,000

11,712

1,691

98,309

2019

11,000

11,797

894

99,106

2020

11,000

11,894

100,000

Instructions

(a) Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.

(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.

(c) Determine the stated interest rate and the effective-interest rate.

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.

(e) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid on January 1.)

(f) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.

Presented below are two independent situations.

(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of \(350,000 at the time of purchase. A \)550,000, zero-interest-bearing note due January 1, 2020, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.
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