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Chapter 14: Q6IFRS (page 772)

Assume the same information as in IFRS14-5, except that the bonds were issued at 84.95 to yield 12%. Prepare the journal entries to record (a) the issuance of the bonds, (b) the payment of interest and 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. The bonds are issued at a discount of$120,400.
  2. Discount of$776 was amortized on 1 July 2017.
  3. Interest expenses of$40,823 were reported on 31 Dec 2017.

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

Issuance of bonds

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Cash

$679,600

Discount on bond payable

$120,400

Bond payable

$800,000

03

Payment of interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$40,776

Discount on bond payable

$776

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 (6%)

Discount amortized

Unamortized Discount

Bond payable

Carrying value

1 Jan 2017

$120,400

$800,000

$679,600

1 July 2017

$40,000

$40,776

$776

$119,624

$800,000

$680,376

31 Dec 2017

$40,000

$40,823

$823

$118,801

$800,000

$681,199

04

 Accrual of interest and amortization

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Interest expenses

$40,823

Discount on bond payable

$823

Interest payable

$40,000

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Most popular questions from this chapter

Question: What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?

(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?

On January 1, Patterson Inc. issued \(5,000,000, 9% bonds for \)4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of:

(a) \(4,725,500. (c) \)258,050.

(b) \(4,714,500. (d) \)4,745,000

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo鈥檚 books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust鈥檚 books on December 31, 2017, 2018, 2019.

The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2011, and the subsequent interest payments and charges. The company鈥檚 year-end is December 31, and financial statements are prepared once yearly.

Amortization Schedule

Year

Cash

Interest

Amount unamortized

Carrying value

1/1/2011

\(5,651

\)94,349

2011

\(11,000

\)11,322

5,329

94,671

2012

11,000

11,361

4,968

95,032

2013

11,000

11,404

4,564

95,436

2014

11,000

11,452

4,112

95,888

2015

11,000

11,507

3,605

95,395

2016

11,000

11,567

3,038

96,962

2017

11,000

11,635

2,403

97,597

2018

11,000

11,712

1,691

98,309

2019

11,000

11,797

894

99,106

2020

11,000

11,894

100,000

Instructions

(a) Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.

(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.

(c) Determine the stated interest rate and the effective-interest rate.

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.

(e) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid on January 1.)

(f) On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.
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