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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

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

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company鈥檚 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

Distinguish between the following interest rates for bonds payable:

(a)Yield rate

(b) Nominal Rate

(c) Stated rate

(d) Market rate

(e) Effective rate

Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 11% and has a carrying value of \(16,000. At year-end, Shonen Knife鈥檚 borrowing rate (credit risk) has declined; the fair value of the note payable is now \)17,500. (a) Determine the unrealized holding gain or loss on the note. (b) Prepare the entry to record any unrealized holding gain or loss.

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.
See all solutions

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