
1.
Prepare
1.

Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.
Bond Premium: It occurs when the bonds are issued at a high price than the face value.
Effective-interest amortization method: Effective-interest amortization method is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.
Prepare journal entry for the sale of the bonds on January 1.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
January 1 | Cash (1) | 321,976 | |||||
Bond Premium (2) | 21,976 | ||||||
Bonds Payable | 300,000 | ||||||
(To record issuance of bonds payable at premium) |
Table (1)
- Cash is an asset and it is increased. So, debit it by $321,976.
- Bond Premium is an adjunct liability account and it is increased. So, credit it by $21,976.
- Bonds payable is a liability and it is increased. So, credit it by $300,000.
Working notes:
Determine the issuance price of the bonds.
Step 1: Calculate the cash interest payment for bonds.
Step 2: Calculate the present value of cash interest payment.
Particulars | Amount |
Interest payment (a) | $9,000 |
PV factor at annual market interest rate of 2% for 8 periods (b) | 7.32548 |
Present value | $65,929 |
Table (2)
Note: The present value factor for 8 periods at 2% interest would be 7.32548 (Refer Appendix E (Table E.2) in the book for present value factor).
Step 3: Calculate the present value of single principal payment of $300,000 (principal amount) at 2% for 8 periods.
Particulars | Amount |
Single principal payment (a) | $300,000 |
PV factor at annual market interest rate of 2% for 8 periods (b) | 0.85349 |
Present value | $256,047 |
Table (3)
Note: The present value factor for 8 periods at 2% interest would be 0.85349 (Refer Appendix E (Table E.1) in the book for present value factor).
Step 4: Calculate the issue price of the bonds.
Calculate the amount of bond premium.
2.
Prepare journal entry to record payment of interest on March 31.
2.

Explanation of Solution
Prepare journal entry for payment of interest on March 31.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
March 31 | Interest Expense (4) | 6,440 | |||||
Bond Premium (5) | 2,560 | ||||||
Cash (3) | 9,000 | ||||||
(To record payment of interest) |
Table (4)
- Interest expense is an expense and it decreases the equity value. So, debit it by $6,440.
- Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,560.
- Cash is an asset and it is decreased. So, credit it by $9,000.
Working notes:
Calculate cash interest payment.
Calculate interest expense.
Calculate bond premium.
Prepare Journal entry to record payment of interest on June 30.

Explanation of Solution
Prepare journal entry for payment of interest on June 30.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
June 30 | Interest Expense (7) | 6,388 | |||||
Bond Premium (8) | 2,612 | ||||||
Cash (6) | 9,000 | ||||||
(To record payment of interest) |
Table (5)
- Interest expense is an expense and it decreases the equity value. So, debit it by $6,388.
- Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,612.
- Cash is an asset and it is decreased. So, credit it by $9,000.
Working notes:
Calculate cash interest payment.
Calculate interest expense.
Calculate bond premium.
Prepare Journal entry to record payment of interest on September 30.

Explanation of Solution
Prepare journal entry for payment of interest on September 30.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
September 30 | Interest Expense (10) | 6,336 | |||||
Bond Premium (11) | 2,664 | ||||||
Cash (9) | 9,000 | ||||||
(To record payment of interest) |
Table (6)
- Interest expense is an expense and it decreases the equity value. So, debit it by $6,336.
- Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,664.
- Cash is an asset and it is decreased. So, credit it by $9,000.
Working notes:
Calculate cash interest payment.
Calculate interest expense.
Calculate bond Premium.
Prepare journal entry to record payment of interest on December 31.

Explanation of Solution
Prepare journal entry for payment of interest on December 31.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
December 31 | Interest Expense (13) | 6,283 | |||||
Bond Premium (14) | 2,717 | ||||||
Cash (12) | 9,000 | ||||||
(To record payment of interest) |
Table (7)
- Interest expense is an expense and it decreases the equity value. So, debit it by $6,283.
- Bond premium is an adjunct liability account and it is decreased. So, debit it by $2,717.
- Cash is an asset and it is decreased. So, credit it by $9,000.
Working notes:
Calculate cash interest payment.
Calculate interest expense.
Calculate bond premium.
3.
Show the presentation of bonds payable that would be reported on December 31
3.

Explanation of Solution
Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and
The presentation of bonds payable that would be reported on December 31 balance sheet is as shown below:
Corporation S Balance Sheet (Partial) As of December 31 | |
Long-term Liabilities: | |
Bonds Payable (15) | $311,423 |
Table (8)
Working note:
Calculate the amount of bonds payable on December 31.
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