1.
Calculate the interest paid to bondholders every six months.
1.
Explanation of Solution
Calculate the semi-annual interest.
Therefore the interest paid to bondholders is $153,000.
Note: Time period = 6 months.
2.
Prepare journal entries.
2.
Explanation of Solution
(a)
Prepare journal entries for the issuance of bonds on January 1, 2017.
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Date | Accounts and Explanations | Debit ($) | Credit ($) | |
2017 | ||||
January | 1 | Cash | 3,400,000 | |
Bonds Payable | 3,400,000 | |||
(To record sale of bonds on par) |
Table (1)
- Cash is an asset account. The amount has increased because bonds are issued at a premium; therefore, debit Cash account with $3,400,000.
- Bonds Payable is a liability account and it is increased therefore; credit Bonds Payable account with $3,400,000.
(b)
Prepare journal entries to record interest payment on June 30, 2017.
Date | Accounts title and Explanations | Debit ($) | Credit ($) | |
2010 | ||||
June | 30 | Bond Interest Expense (1) | 153,000 | |
Cash | 153,000 | |||
(To record the payment of semi-annual interest) |
Table (2)
- Bond Interest Expense is a component of stockholders equity. There is an increase in the expense account which decreased the stockholders’ equity. Therefore, debit interest expense account by $153,000.
- Cash is an asset account and it is decreased. Therefore credit cash account by $153,000
Working Notes:
Calculate amount of interest payable.
Note: Time period = 6 months (January, 2017 to June 30, 2017)
(C)
Prepare journal entries to record interest payment on December 31, 2017.
Date | Accounts title and Explanations | Debit ($) | Credit ($) | |
2010 | ||||
June | 30 | Bond Interest Expense (2) | 153,000 | |
Cash | 153,000 | |||
(To record the payment of semi-annual interest) |
Table (3)
- Bond Interest Expense is a component of stockholders equity. There is an increase in the expense account which decreased the stockholders’ equity. Therefore, debit interest expense account by $153,000.
- Cash is an asset account and it is decreased. Therefore credit cash account by $153,000
Working Notes:
Calculate amount of interest payable.
Note: Time period = 6 months (June 30, 2017 to December 31, 2017)
3.
Prepare journal entries for issuance of bonds.
3.
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.
Discount on bonds payable:
Discount on bonds payable occurs when the bonds are issued at a lower price than the face value.
Premium on bonds payable:
Premium on bonds payable occurs when the bonds are issued at a higher price than the face value of bond.
(a)
Prepare journal entries for issuance of bonds at $98.
Date | Account title and explanation |
Debit $ |
Credit $ |
2017 | Cash (3) | 3,332,000 | |
January 1 | Discount on Bonds Payable(4) | 68,000 | |
Bonds Payable | 3,400,000 | ||
(To record issued bonds payable at a discount) |
Table (4)
- Cash is an asset and it is increased. So, debit it by $3,332,000.
- Discount on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $68,000.
- Bonds payable is a liability and it is increased. So, credit it by $3,400,000.
Working note:
Calculate the cash received on issuance of bond in discount:
Calculate the discount on bonds payable:
(b)
Prepare journal entries for issuance of bonds at $102.
Date | Accounts and Explanations | Debit ($) | Credit ($) | |
2017 | ||||
January | 1 | Cash (5) | 3,468,000 | |
Premium on Bonds Payable ( (6) | 68,000 | |||
Bonds Payable | 3,400,000 | |||
(To record sale of bonds on premium) |
Table (5)
- Cash is an asset account. The amount has increased because bonds are issued at a premium; therefore, debit Cash account with $3,468,000.
- Premium on Bonds Payable is an adjunct account to Bonds Payable account and it has a normal credit balance; therefore, credit Premium on Bonds Payable account with $68,000.
- Bonds Payable is a liability account and it is increased therefore; credit Bonds Payable account with 3,400,000.
Working note:
Calculate the cash received on issuance of bond on premium:
Calculate the premium on bonds payable:
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