Chapter 10, Problem 10.4AP

(a)

To determine

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Redemption of Bonds

The process of repaying the sale amount of bonds to bondholders at the time of maturity or before the maturity period is called as redemption of bonds. It is otherwise called as retirement of bonds.

To prepare: The journal entry to record the issuance of bonds for Corporation K on October 1, 2016.

Answer to Problem 10.4AP

Prepare the journal entry to record the issuance of bonds for Corporation K on October 1as shown below:

Date	Account title and Explanation	Debit	Credit
October 1, 2016	Cash	$700,000
	Bonds payable		$700,000
	(To record the issuance of 5% bonds payable at face value for Corporation K)

Table (1)

Explanation of Solution

• Cash is a current asset and increased. Therefore, debit Cash account for $396,000.
• Bonds payable is a long-term liability and increased. Therefore, credit bonds payable account for $700,000.

(b)

To determine

To prepare: The adjusting entry to record the accrual of interest for Corporation K on December 31, 2016.

Answer to Problem 10.4AP

The adjusting entry to record the accrual of interest for Corporation K on December 31, 2017 as shown below:

Date	Account title and Explanation	Debit	Credit
December 31, 2016	Interest expense (1)	$8,750
	Interest payable		$8,750
	(To record the accrual interest expense for Corporation K)

Table (2)

Working note:

Calculation of Interest expense for Corporation K is shown below:

$\begin{array}{c}\text{Interest expense =}\text{Face value of bond}\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$700,000}\times \text{5\%}\times \frac{3\text{Months}}{12\text{Months}}\\ =\$8,750\end{array}$ (1)

Explanation of Solution

• Interest expense is a component of stockholders’ equity and decreased it. Therefore, debit interest expense account for $8,750.
• Interest payable is a current liability and increased. Therefore, credit interest payable account for $8,750.

(c)

To determine

To prepare: The balance sheet presentation of bonds payable and bond interest payable of Incorporation K.

Answer to Problem 10.4AP

Prepare the balance sheet presentation of bonds payable and bond interest payable of Incorporation K as shown below:

Figure (1)

Explanation of Solution

The balance sheet presentation of interest payable ($8,750) comes under the current liability section and the balance sheet presentation of bonds payable ($700,000) comes under long-term liability section.

(d)

To determine

To prepare: The journal entry to record the payment of interest for Corporation K on October 1, 2017.

Answer to Problem 10.4AP

Prepare the journal entry to record the payment of interest for Corporation K on October 1, 2017 as shown below:

Date	Account title and Explanation	Debit	Credit
October 1, 2017	Interest expense (1)	$26,250
	Interest payable (3)	$8,750
	Cash (2)		$35,000
	(To record the payment of interest expense for Corporation K)

Table (3)

Working note:

Calculation of interest expense for Corporation K on 1^st October 2017 is shown below:

$\begin{array}{c}\text{Interest expenses =}\text{Face value of bonds }\times \text{Interest rate }\times \text{Time period}\\ =\$700,000\times 5\%\times \frac{9\text{Months}}{12\text{Months}}\\ =\$26,250\end{array}$ (1)

Calculation of cash paid for bonds payable of Corporation K 1^st October 2017 is shown below:

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds }\times \text{Interest rate }\times \text{time period}\\ \text{=}\text{\$700,000}\times \text{5\%}\times \frac{12}{12}\\ =\$35,000\end{array}$ (2)

Calculation of Interest expense for Corporation K is shown below:

Calculation of Interest payable of Corporation K 1^st October 2017 is shown below:

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds }\times \text{Interest rate }\times \text{time period}\\ \text{=}\text{\$700,000}\times \text{5\%}\times \frac{3\text{Months}}{12\text{Months}}\\ =\$8,750\end{array}$ (3)

Explanation of Solution

• Interest expense is a stockholders’ equity, and decreased it. Therefore, debit interest expense account for $26,250.
• Interest payable is a current liability and decreased. Therefore, debit interest payable account for $8,750.
• Cash is a current asset account, and decreased. Therefore, cash account for $35,000.

(e)

To determine

To prepare: The adjusting entry to record the accrual of interest for Corporation K on December 31, 2017.

Answer to Problem 10.4AP

The adjusting entry to record the accrual of interest for Corporation K on December 31, 2017 as shown below:

Date	Account title and Explanation	Debit	Credit
December 31, 2017	Interest expense (1)	$8,750
	Interest payable		$8,750
	(To record the accrual interest expense for Corporation K)

Table (4)

Working note:

Calculation of Interest expense for Corporation K is shown below:

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds }\times \text{Interest rate }\times \text{time period}\\ \text{=}\text{\$700,000}\times \text{5\%}\times \frac{3\text{Months}}{12\text{Months}}\\ =\$8,750\end{array}$ (1)

Explanation of Solution

• Interest expense is a component of stockholders’ equity and decreased it. Therefore, debit interest expense account for $8,750.
• Interest payable is a current liability and increased. Therefore, credit interest payable account for $8,750.

(f)

To determine

To prepare: The journal entry to record the payment of interest for Corporation K on January 1, 2018.

Answer to Problem 10.4AP

Prepare the journal entry to record the payment of interest for Corporation K on January 1, 2018 as shown below:

Date	Account title and Explanation	Debit	Credit
January 1, 2018	Interest payable	$8,750
	Cash		$8,750
	(To record the payment of interest expense for Corporation K)

Table (5)

Explanation of Solution

Interest payable is a current liability, and decreased. Therefore, interest payable account for $8,750

Cash is a current asset, and decreased. Therefore, cash account for $8,750.

To determine

To prepare: The journal entry to record the redemption of bonds for Corporation K on January 1, 2018.

Answer to Problem 10.4AP

Prepare the journal entry to record the redemption of bonds for Corporation K on January 1, 2018 as shown below:

Date	Account title and Explanation	Debit	Credit
January 1, 2018	Bonds payable	$700,000
	Loss on redemption of bonds (2)	$28,000
	Cash (1)		$728,000
	(To record the redemption of bonds before the maturity period for Corporation K)

Table (6)

Working notes:

Calculation of cash paid for redemption of bonds payable is shown below:

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds }\times \text{1}\text{.04}\\ \text{=}\text{\$700,000}\times \text{1}\text{.04}\\ \text{=}\text{\$728,000}\end{array}$ (1)

Calculation of loss on redemption of bonds payable is shown below:

$\begin{array}{c}\text{Loss on redemption of bonds =}\text{Cash paid }-\text{Face value of bonds}\\ \text{=}\text{\$728,000}-\$700,000\\ =\$28,000\end{array}$ (2)

Explanation of Solution

Bonds payable is a long-term liability, and decreased. Therefore, debit bonds payable account for $700,000

Loss on redemption of bonds is a component of stockholders’ equity, and decreased. Therefore, debit loss on redemption of bonds for $28,000.

Cash is a current asset, and decreased. Therefore, credit cash account for $728,000