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Chapter 14: Q7BE (page 753)

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. 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.

Short Answer

Expert verified

The total for both the debit and credit sides is $686,636.

Step by step solution

01

Meaning of Premium on Bond Payable

Premium on bond payablerefers to the cash received over the par value of the issued bond. It is credited in account "premium on bond payable" and amortized over the maturity period.

02

Journal Entries

Journal Entries

Date

Accounts and Explanation

Debit

Credit

January 1, 2017

Cash

$644,636

Bonds Payable

$600,000

Premium on Bonds Payable

$44,636

July 1, 2017

Interest expenses

$19,339.08

Premium on Bonds Payable

$1,660.92

Cash

$21,000.00

December 31, 2017

Interest expenses

$19,289.25

Premium on Bonds Payable

$1,710.75

Interest Payable ($600,000 x 7% x 1/2)

$21,000






Working:

Premium on bonds payable on January 1= ($644,636-$600,000)= $44,636

Interest expenses on July 1 = (644,636 x 6% x 1/2)= $19,339.08

Premium on bond payable on July 1 ($21,000-19,339.08) = $1,660.92

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

Interest expenses on December 31 = {(644,636 -$1,660.92)x 6% x 1/2} =$19,289.25

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

Premium on bond payable on December 31 ($21,000-19,289.25) = $1,710.75.

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Most popular questions from this chapter

Lady Gaga Co. recently made an investment in the bonds issued by Chili Peppers Inc. Lady Gaga鈥檚 business model for this investment is to profit from trading in response to changes in market interest rates. How should this investment be classified by Lady Gaga? Explain.

On December 31, 2017, American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, \(3,000,000 note receivable by the following modifications:

  1. Reducing the principal obligation from \)3,000,000 to \(2,400,000.
  2. Extending the maturity date from December 31, 2017, to January 1, 2021.
  3. Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays \)2,400,000 in cash to American Bank.

Instructions

  1. Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
  2. Can Barkley Company record a gain under the term modification mentioned above? Explain.
  3. Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
  4. Prepare the interest payment entry for Barkley Company on December 31, 2019.
  5. What entry should Barkley make on January 1, 2021?

Determine Proper Amounts in Account Balances) Presented below are two independent situations.

(a) George Gershwin Co. sold \(2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Gershwin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017.

(b) Ron Kenoly Inc. issued \)600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017.

What are the general rules for measuring gain or loss by both creditor and debtor in a troubled-debt restructuring involving a settlement?

(Amortization Schedule鈥擲traight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)
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