**Bond Discount: Entries for Bonds Payable Transactions**### InstructionsOn July 1, Year 1, Khatri Industries Inc. issued $18,000,000 of 10-year, 5% bonds at a market (effective) interest rate of 6%, receiving cash of $16,661,102. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.#### Required:1. **Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.**2. **Journalize the entries to record the following:** a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. *Round to the nearest dollar.* b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. *Round to the nearest dollar.*3. **Determine the total interest expense for Year 1.**4. **Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest?**5. **Compute the price of $16,661,102 received for the bonds by using the tables shown in Present Value Tables. Round to the nearest dollar.***Refer to the chart of accounts for the exact wording of the account titles. CNOW journals do not use lines for journal explanations. Every line on a journal page is used for debit or credit entries. CNOW journals automatically indent a credit entry when a credit amount is entered.*

Solution: Introduction: A bond is a financial debt instrument so it requires its issuing company to pay periodic interest payments based on the stated interest rate. And it also requires a company to return the principal at maturity.Since bonds payable involves future payments, we need to convert future cash flow in terms of present cash flows.Present value of money, which explains that any amount of money received today has more value than received in future. It is better to receive money today rather than tomorrow.In simple terms the price of the bonds should be equal to its Present value of future cash outflows. ( total of interest and Principal).Analysis and Calculation: As we discussed above that the sum of the total of Present Value of Principal and interest amounts are the actual price of bonds.Here the market rate is higher than the coupon rate, hence so bonds are issued at Discount. Therefore Cash accounts will be debited with the price received today and bonds Payable accounts will be credited with the face value. And the difference between these two would be the Discount on Bonds Payable. 1) Journal entry for issuance of bonds at discount is as follows: Date Account Name Dr. $ Cr. $ July 1, Year 1 Cash Dr. $166,61,102 Discount on bonds payable Dr. $13,38,898 Bonds payable Cr. $180,00,000 ++++when interest is calculated on semiannual basis interest rate becomes half and time period doubles. Present value of Bonds payable (Calculated) amount comes as $166,61,102 and the future Bonds Payable value is given as $18,000,000 So difference between these two would be the amount of Discount on Bonds Payable of $13,38,898. ($180,00,000 - $166,61,102). 2. To record the Interest payment and the amortization of bond discount for the month of Dec 31, Year 1 and June 30, Year 2 are as follows: Date Account Name Dr. $ Cr. $ Dec 31, Year 1 Interest Expense Dr. 516,945 Discount on Bonds payable Cr. 66,945 Interest payable/ Cash Cr. 450,000 June 30, Year 2 Interest Expense Dr. 516,945 Discount on Bonds payable Cr. 66,945 Interest payable/ Cash Cr. 450,000 ++Interest calculation = $180,00,000*(5/100)*(6/12) = $4,50,000 Discount on Bonds payable = $13,38,898 Amortized over 10 years = $13,38,898/10 (Straight-line) = $133,890 per year. On Semi annual basis = $133,890/2 = $66,945 3) Here we can see that interest paid to bondholders is $450,000 each six month, but interest expenses is more than $450,000 this is due to discount charged to interest expenses account. Therefore, total Interest Expenses for the Year 1 are $516,945. 4) Yes. If the Contract rate is less than the Market interest rate, then the bond will sell for less than the face value of the bonds. It is regarded as bonds issued at discount. The Present value of cash proceeds of bonds payable will always be less than the face value of bonds payable issued price. 5) Price of bonds where market rate is 6% Future value of principal amount = 180,00,000* PV factor using present value table of $1 at 3% and 20 times period+++ = $180,00,000* 0.55368 = $ 99,66,240 Future value of interest amounts = semiannual interest amount* PV factor using present value table of ordinary annuity at 3% and 20th time period = ($180,00,000*0.05*6/12) *14.877 = $450,000*14.87747 = $66,94,862 So present value of Principal and interest = $99,66,240+ $66,94,862 = $166,61,102 Price of the bonds will be $166,61,102.

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On July 1, Year 1, Khatri Industries Inc. issued $18,00 Interest on the bonds is payable semiannually on Dec Required: 1. Journalize the entry to record the amount of ca 2. Journalize the entries to record the following:* a. The first semiannual interest payment on C

On July 1, Year 1, Khatri Industries Inc. issued $18,00 Interest on the bonds is payable semiannually on Dec Required: 1. Journalize the entry to record the amount of ca 2. Journalize the entries to record the following:* a. The first semiannual interest payment on C

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On July 1, Year 1, Khatri Industries Inc. issued $18,000,000 of 10-year, 5% bonds at a market (effective) interest rate of 6%, receiving cash of $16,661,102. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Required: 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.* 2. Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar. b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar. 3. Determine the total interest expense for Year 1. 4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest? 5. Compute…
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