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Chapter 14: Q6BE (page 753)

On January 1, 2017, JWS Corporation issued \(600,000 of 7% bonds, due in 10 years. The bonds were issued for \)559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company鈥檚 journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%

Short Answer

Expert verified

The total for both the debit and credit sides is $644,792.68.

Step by step solution

01

Meaning of Coupon Bond

Bonds that pay periodic interest amount to the bondholder atequal frequency is coupon bond. Interest paid on bond at stated coupon rate.

02

Journal Entries

Date

Accounts and Explanation

Debit

Credit

January 1, 2017

Cash

$559,224

Discount on bonds payable

$40,776

Bonds Payable

$600,000

July 1, 2017

Interest expenses (559,224 x 8% x 1/2)

$22,368.96

Cash

$21,000.00

Discount on Bonds Payable

$1,368.96

December 31, 2017

Interest expenses

$22,423.72

Interest Payable

$21,000

Discount on Bonds Payable

$1,423.72

Working:

Discount on bonds payable on January 1= ($600,000-$559,224) = $40,776

Interest expenses on July 1 = ($559,224 x 8% x 1/12) = $22,368.96

Interest paid in cash paid on July 1= ($600,000 x 7% x 1/2) = $21,000.

Interest expenses on December 31 = {(559,224 +$1,368.96) x 8% x 1/2} = $22,423.72

Interest payable on December 31, 2017 = ($600,000 x 7% x 1/2) = $21,000

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Most popular questions from this chapter

(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.

(Round answers to the nearest cent.)

(a) December 31, 2016. (d) December 31, 2019.

(b) December 31, 2017. (e) December 31, 2020.

(c) December 31, 2018.

Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.

(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.

(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.

(Entries and Questions for Bond Transactions) On June 30, 2017, Mischa Auer Company issued \(4,000,000 face value of 13%, 20-year bonds at \)4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semi-annual interest on June 30 and -December 31.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on June 30, 2017.

(2) The payment of interest and the amortization of the premium on December 31, 2017.

(3) The payment of interest and the amortization of the premium on June 30, 2018.

(4) The payment of interest and the amortization of the premium on December 31, 2018.

(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet.

(c) Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2018?

(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

(3) Determine the total cost of borrowing over the life of the bond.

(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

What is done to record properly a transaction involving the issuance of a non-interest -bearing long-term note in exchange for property?

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.
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