Chapter 10, Problem 10PSB

To determine

Bonds:

Bonds are a kind of the security which an investor invests in an entity for a specific period at a fixed interest rate. These bonds are issued at that time when entity needs huge amount of fund.

1.

To prepare: Journal entry to record the bonds’ issuance.

Explanation of Solution

Issue of bonds at discount on January 30, 2017

Date	Account Title and Explanation	Post.Ref.	Debit($)	Credit($)
Jan 30	Cash		493,608
	Premium on bonds payable			43,608
	Bonds payable			450,000
	(To record the issue bonds at premium)

Table (1)

• Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.
• Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increase the liabilities of the company. So, credit the premium on bonds payable account.
• Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.

2.

To determine

Net expense of interest on bond

Explanation of Solution

Particulars	Amounts($)
Amount repaid:
Interest payment	234,000
Add: Maturity value	450,000
Repaid amount	684,000
Less: Borrowed amount	493,608
Net expense of interest on bond	190,392

Table (2)

Hence, net expense interest on bond is $190,392.

Working notes:

Given,

Value of bond is $450,000.

Rate of interest is 13%.

Time period is 0.5.

Calculation of amount of the interest paid at semiannual period,

$\begin{array}{c}\text{Interest}\text{amount}=\text{Value}\text{of}\text{the}\text{bond}\times \text{Rate}\text{of}\text{interest}\times \text{Time}\text{period}\\ =\text{\$450,000}\times 13\text{\%}\times \text{0}\text{.5}\\ =\text{\$29,250}\end{array}$

Calculation of amount of interest repaid,

$\begin{array}{c}\text{Interest}\text{payment}=\text{Interest}\text{semiannual}\text{amount}\times \text{Number}\text{of}\text{payment}\text{period}\\ =\$29,250\times 8\\ =\$234,000\end{array}$

3.

To determine

Effective interest amortization method.

Explanation of Solution

Table (3)

4.

To determine

To prepare: Journal entry.

Explanation of Solution

Payment of interest on June 30, 2017

Date	Account Title and Explanation	Post.Ref.	Debit($)	Credit($)
June 30	Bonds interest expense		24,980
	Premium on bonds payable		4,570
	Cash			29,250
	(To record the paid semiannual interest and record premium amortization)

Table (4)

• Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account.
• Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increases the liabilities of company. Now premium on bonds payable has been paid which decrease the liability. So, debit the premium on bonds payable account.
• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.

Payment of interest on December 31, 2017

Date	Account Title and Explanation	Post.Ref.	Debit($)	Credit($)
Dec 31	Bonds interest expense		24,980
	Premium on bonds payable		4,570
	Cash			29,250
	(To record the paid semiannual interest and record amortization)

Table (5)

• Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account
• Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increases the liabilities of company. Now premium on bonds payable has been paid which decrease the liability. So, debit the premium on bonds payable account.
• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.

5.

To determine

To prepare: Journal entry at retirement for 2%.

Explanation of Solution

Retirement of bonds on January 1, 2019 at 98%

Date	Account Title and Explanation	Post.Ref.	Debit($)	Credit($)
Jan 1, 2019	Bonds payable		180,000
	Premium on bonds payable		23,912
	Loss on retirement of bonds		3,088
	Cash			477,000
	(to record retirement of bonds at premium)

Table (6)

• Bonds payable account is the liabilities account. Bonds have been retired, which decreases the liabilities of the company. So, debit the bonds payable account.
• Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increases the liabilities of company. Now premium on bonds payable has been paid which decrease the liability. So, debit the premium on bonds payable account.
• Loss on retirement of bond is a nominal account. Retirement of bond is a loss for the company which decreases the income of the company. So, debit the loss on retirement of bond account.
• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.

6.

To determine

Change in interest rate will affect the amount reported in financial statement account.

Explanation of Solution

• If the bonds are issued at the 14% instead of the 10%, then bonds will be issued at discount. As the rate of interest on account for 13% which is less than rate of return in the new market.
• The change in the market rate of interest decreases the bond liability of the company in the balance sheet. But, the bond liability increases gradually with amortization of the premium.
• In this case, the cash flow statement will show greater amount of bond interest expense till the maturity period of the bond