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Chapter 14: Q5E (page 755)

Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%

Instructions

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2017.

(c) The accrual of interest and the related amortization on December 31, 2017.

Short Answer

Expert verified

(a) The bonds are issued at$612,000.

(b) The business entity amortized a $102 premium on bonds payable.

(c) The business entity amortized a $107premium on bonds payable.

Step by step solution

01

Definition of Bonds Payable

Bond payable can be defined as the securities that are issued by the business to creditors for generating cash. It is reported as the non-current liability of the business entity.

02

Issuance of the bonds

Date

Accounts and explanation

Debit $

Credit $

1 Jan 2017

Cash($600,000脳$102$100)

$612,000

Premium on bond payable

$12,000

Bonds payable

$600,000

(To record the issue of bonds on premium)

03

Payment of interest and related amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$29,898

Premium on bond payable

$102

Cash

$30,000

(To record the payment of interest and amortization of premium)

Working note:

Calculation of premium amortized:

Particular

Amount $

Interest @ 9.7705% on the book value of bond payable($612,000脳9.7705%脳12)

$29,898

Interest @ 10% on bond payablerole="math" localid="1658993146314" ($600,000脳10%脳12)

($30,000)

Amortization of premium

$102

04

Accrual of interest

Date

Accounts and Explanation

Debit $

Credit $

12 Dec 2017

Interest expenses

$29,893

Premium on bond payable

$107

Interest payable

$30,000

(To record the accrual of interest)

Particular

Amount $

Interest @ 9.7705% on the book value of bond payable(($612,000鈭�$102)脳9.7705%脳12)

$29,893

Interest @ 10% on bond payable ($600,000脳10%脳12)

($30,000)

Amortization of premium

$107

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Most popular questions from this chapter

On December 31, 2017, Hyasaki Corporation has the following account balance:

Bonds payable, due January 1, 2026 \(2,000,000

Discount on bonds payable \) 88,000

Interest payable $ 80,000

Show how the above accounts should be presented on the December 31, 2017, balance sheet, including the proper classifications.

On January 1, 2017, Henderson Corporation redeemed \(500,00 of bonds at 99. At the time of redemption, the unamortized premium was \)15,000. Prepare the corporation鈥檚 journal entry to record the reacquisition of the bonds.

(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information

regarding its equity investments.

December 31, 2017

Investments Cost Fair Value Unrealized Gain (Loss)

Clemson Corp. stock \(20,000 \)19,000 \((1,000)

Colorado Co. stock 10,000 9,000 (1,000)

Buffaloes Co. stock 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 (1,400)

Previous fair value adjustment balance 鈥�0鈥�

Fair value adjustment鈥擟r. \)(1,400)

During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.

stock鈥擻)19,100; Buffaloes Co. stock鈥�$20,500. None of the equity investments result in significant influence.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.

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.

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.
See all solutions

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