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Chapter 14: Q3BE (page 753)

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

Short Answer

Expert verified

The total for both debit and credit sides is $331,200.

Step by step solution

01

Meaning of Straight Line Amortization

When the discount on the bond is amortized over the maturity period in a fixed annual amount, dividing the discount amount by the maturity period is known as straight-line amortization. The maturity period becomes twice oforiginal maturity period if interest is payable semi-annually.

02

Journal Entries

Journal Entries

Date

Accounts and Explanation

Debit

Credit $

January 1, 2017

Cash

$294,000

Discount on Bonds Payable

$6,000

Bonds Payable

$300,000

July 1, 2017

Interest expenses

$15,600

Cash

$15,000

Discount on Bonds Payable

$600

December 31, 2017

Interest expenses

$15,600

Interest Payable

$15,000

Discount on Bonds Payable

$600

Working:

Cash on January 1, 2017 = ($300,000 x 98%) = $294,000

Interest expenses paid cash on July 1, 2017 = ($300,000 x 10% x 6/12) = $15,000

Discount on bonds payable on July 1, 2017 (amortize semi-annually) = ($6,000 x 1/10) = $600

Discount on bonds payable on December 31, 2017 = ($6,000 x 1/10) = $600

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Most popular questions from this chapter

Coldwell, Inc. issued a \(100,000. 4-years, 10% note at face value to Flint Hills Bank on January 1, 2017, and received \)100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell鈥檚 journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company鈥檚 credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

  1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
  2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months鈥� interest and the amortization of premium on the bonds.

On January 1, Martinez Inc. issued \(3,000,000, 11% bonds for \)3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of:

(a) \(3,185,130. (c) \)3,173,550.

(b) \(3,184,500. (d) \)3,165,000.

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

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.
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