Chapter 10, Problem 10.8PA

1.

To determine

To prepare: Abond amortization schedule.

Explanation of Solution

Amortization Schedule: An amortization schedule is a table that shows the details of each loan payment allocated between the principal amount and the overdue interest along with the beginning and ending balance of the loan. From the amortization schedule of the loan, the periodical interest expense, total interest expense and total payment made are known.

Prepare bond amortization schedule as below:

Bond amortization schedule – Simplified Effective- Interest Amortization Method
Period	Bonds Payable, Net (A)	Interest Expense (bonds payable, net x 4%) (B)	Cash Paid (Face value x 3%) (C)	Interest Added to Bonds Payable (D) = (B) – (C)	Bonds Payable, Net (E) = (A) + (D)
01/01/15-12/31/15	583,352	23,334	18,000	5,334	588,686
01/01/16-12/31/16	588,686	23,547	18,000	5,547	594,233
01/01/17-12/31/17	594,233	23,767 (rounded)	18,000	5,767	600,000

Table (1)

2.

To determine

To prepare: Journal entry to record the issuance of the bonds on January 1, 2015.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented 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.

Prepare journal entry for cash proceeds from the issuance of the bonds on January 1, 2015.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
January 1, 2015		Cash				583,352
			Bonds Payable, Net				583,352
				(To record issuance of bonds payable)

Table (2)

• Cash is an asset and it is increased. So, debit it by $583,352.
• Bonds payable, net is a liability and it is increased. So, credit it by $583,352.

3.

To determine

To prepare: Journal entry to record the interest payment on December 31, 2015.

Explanation of Solution

Prepare journal entry for payment of interest on bonds.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
December 31, 2015		Interest Expense				23,334
			Bonds Payable, net				5,334
			Cash				18,000
				(To record payment of interest on bonds)

Table (3)

• Interest expense is an expense and it decreases the equity value. So, debit it by $23,334.
• Bonds payable, net is a liability and it is decreased. So, creditit by $5,334.
• Cash is an asset and it is decreased. So, credit it by $18,000.

Working notes:

Calculate cash interest payment.

$\begin{array}{c}\text{Cash Interest Payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times 3\%\times 1\\ =\$18,000\end{array}$

Calculate interest expense.

$\begin{array}{c}\text{Interest expense}=\text{Carrying amount }\times \text{Market interest}\times \text{Time}\\ =\$583,352\times 4\%\times 1\\ =\$23,334\end{array}$

Calculate bonds payable, net.

$\begin{array}{c}\text{Bonds payable, net}=\text{Interest Expense}–\text{Cash interest payment }\\ =\$23,334-\$18,000\\ =\$5,334\end{array}$

To determine

To prepare: Journal entry to record the interest payment on December 31, 2016.

Explanation of Solution

Prepare journal entry for payment of interest on bonds.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
December 31, 2016		Interest Expense				23,547
			Bonds Payable, net				5,547
			Cash				18,000
				(To record payment of interest on bonds)

Table (3)

• Interest expense is an expense and it decreases the equity value. So, debit it by $23,547.
• Bonds payable, net is a liability and it is decreased. So, creditit by $5,547.
• Cash is an asset and it is decreased. So, credit it by $18,000.

Working notes:

Calculate cash interest payment.

$\begin{array}{c}\text{Cash Interest Payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times 3\%\times 1\\ =\$18,000\end{array}$

Calculate interest expense.

$\begin{array}{c}\text{Interest expense}=\text{Carrying amount }\times \text{Market interest}\times \text{Time}\\ =\left(\$583,352+\$5,334\right)\times 4\%\times 1\\ =\$23,547\end{array}$

Calculate bonds payable, net.

$\begin{array}{c}\text{Bonds payable, net}=\text{Interest Expense}–\text{Cash interest payment }\\ =\$23,547-\$18,000\\ =\$5,547\end{array}$

4.

To determine

To prepare: Journal entry to record the interest and face value payment on December 31, 2017.

Explanation of Solution

Prepare journal entry for payment of interest and face value.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
December 31, 2017		Interest Expense				23,767
		Bonds Payable, net				594,233
			Cash				618,000
				(To record payment of interest and face value)

Table (3)

• Interest expense is an expense and it decreases the equity value. So, debit it by 23,767.
• Bonds payable, net is a liability and it is decreased. So, debit it by $594,233.
• Cash is an asset and it is decreased. So, credit it by $618,000.

Working notes:

Calculate cash interest payment.

$\begin{array}{c}\text{Cash Interest Payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times 3\%\times 1\\ =\$18,000\end{array}$

Calculate interest expense.

$\begin{array}{c}\text{Interest expense}=\text{Carrying amount }\times \text{Market interest}\times \text{Time}\\ =\left(\$583,352+\$5,334+\$5,547\right)\times 4\%\times 1\\ =\$23,767\end{array}$

Calculate bonds payable, net.

$\begin{array}{c}\text{Bonds payable, net}=\left(\text{Cash interest payment +}\text{Face value }\right)-\text{Interest Expense}\\ =\left(\$18,000+\$600,000\right)-\$23,767\\ =\$618,000-\$23,767\\ =\$594,233\end{array}$

5.

To determine

To prepare: Journal entry to record the bond retirement on January 1, 2017.

Explanation of Solution

Retirement 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 retirement of bonds. It is otherwise called as redemption of bonds.

Prepare Journal entry to record the bond retirement on January 1, 2017.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
January 1, 2017		Bonds Payable, net				594,233
		Loss on Retirement of Bonds				11,767
			Cash				606,000
				(To record the retirement of the bonds)

• Bonds payable, net is a liability and it is decreased. So, debit it by $594,233.
• Loss on retirement of bonds is an equity account and it is decreased. So, debit it by $11,767.
• Cash is an asset and it is decreased. So, credit it by $606,000

Working note:

Compute loss on the redemption of the bonds payable.

$\begin{array}{c}\begin{array}{l}\text{Loss on redemption}\\ \text{ of bonds payable}\end{array}\}=\left(\begin{array}{l}\text{Cash paid to retire }\\ \text{the bonds}\end{array}\right)-\text{Bonds payable, net}\\ =\left(\$600,000\times 101\%\right)-\$594,233\\ =\$606,000-\$594,233\\ =\$11,767\end{array}$