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Chapter 14: Q6Q (page 752)

How should discounts on bonds payable be reported on the financial statements? Premium on bonds payable?

Short Answer

Expert verified

The discount or the premium on bonds payable that is yet to disbursed for interest expense will be listed promptly after the maturity amount of the bonds in the liabilities portion of the balance sheet.

Step by step solution

01

Meaning of Bonds Payable

Bonds payable is a liability account that comprises the amount that the issuer has to pay to the bondholders. It usually appears within the long-term liabilities portion of the balance sheet, as bonds payable generally mature after one year.

02

Reporting of discount or premium on bonds payable on the financial statements

The discount on bonds payable should be recorded in the balance sheet by directly subtracting it from the bond鈥檚 face value. However, the premium on bonds payable should be recorded by adding it to the maturity amount of the bond. Both are considered liability valuation accounts.

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Most popular questions from this chapter

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton鈥檚 December 31, 2017, adjusting entry.

Strickland Company owes \(200,000 plus \)18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland鈥檚 business deteriorated due to a faltering regional economy. On December 31, 2017, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of \(390,000, accumulated depreciation of \)221,000, and a fair value of \(180,000.

Instructions

  1. Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
  2. How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2017 income statement?
  3. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock (\)10 par) which has a fair value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland鈥檚 stock as a trading investment, prepare the entries to record the transaction for both parties.

In each of the following independent cases, the company closes its books on December 31.

1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.

2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.

Instructions

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Describe the two criteria for determining the valuation of financial assets.

Distinguish between the following interest rates for bonds payable:

(a)Yield rate

(b) Nominal Rate

(c) Stated rate

(d) Market rate

(e) Effective rate
See all solutions

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