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Chapter 14: Q5IFRS (page 772)

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.)

Short Answer

Expert verified
  1. Premium on bond payable totals$158,336.
  2. Premium of$1,666 will be amortized on 1 July 2017.
  3. On December 31 2017 there was an accrual of interest expenses of$38,267.

Step by step solution

01

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

02

Journal entry for issuance of bonds

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Cash

$958,336

Bond payable

$800,000

Premium on bond payable

$158,336

03

Journal entry for interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$38,334

Premium on bond payable

$1,666

Cash

$40,000

Working note: Amortization table

Date

Cash interest at the stated rate on bond payable (5%)

Interest expenses at market rate on carrying value (4%)

Premium amortized

Unamortized premium

Bond payable

Carrying value

1 Jan 2017

$158,336

$800,000

$958,336

1 July 2017

$40,000

$38,334

$1,666

$156,670

$800,000

$956,670

31 Dec 2017

$40,000

$38,267

$1,733

$154,937

$800,000

$954,937

04

Accrual of interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Interest expenses

$38,267

Premium on bond payable

$1,733

Interest payable

$40,000

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Most popular questions from this chapter

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

(Effective-Interest Method) Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help.

On June 30, 2017, Hobart Company issued \(2,000,000 face value of 11%, 20-year bonds at \)2,171,600, a yield of 10%. Hobart Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding stock, manages the company鈥檚 operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Nina Friendly who, as a nonemployee investor, owns 40% of the stock. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita鈥檚 stock.

All of Donald鈥檚 personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won鈥檛 be able to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company鈥檚 future direction, even if it meant replacing Donald as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita鈥檚 credit rating, and will increase the company鈥檚 reported losses due to the growth in interest expense. Nina and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of 鈥渉is鈥� company, Donald is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.

Instructions

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues in this case?

(c) What would you do if you were Donald?

On January 2, 2012, Banno Corporation issued \(1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable 鈥渋nterest method.鈥�)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Banno called \)900,000 face amount of the bonds and redeemed them.

Instructions

Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.
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