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1.
Prepare the
1.
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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 $1,000 per bond, to raise fund for financing the operations.
Prepare journal entry for issuance of bonds payable on January 1, 2015.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2015 | Cash | 3,456,448 | |||||
January 1 | Discount on Bonds Payable | 543,552 (1) | |||||
Bonds Payable | 4,000,000 | ||||||
(To record issuance of bonds payable at discount) |
Table (1)
Working Note:
Calculate the amount of total bonds discount.
Par
Issue price of bonds = $3,456,448
Description:
- Cash is an asset and it is increased. So, debit it by $3,456,448.
- Discount on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $543,552.
- Bonds payable is a liability and it is increased. So, credit it by $4,000,000.
2.
Compute for each semiannual period;
- (a) The cash payment
- (b) The straight-line discount amortization
- (c) The bond interest expense
2.
![Check Mark](/static/check-mark.png)
Explanation of Solution
(a)
Calculate the amount of cash interest paid (semiannually).
Par value of bonds = $4,000,000
Interest rate = 6%
Therefore, the amount of cash interest paid (semiannually) is $120,000.
(b)
Calculate amortization of bond discount per interest payment.
Total bonds discount = $543,552 (1)
Number of semiannual payments = 30 (15 years semiannual payments)
Therefore, the amortization of bond discount per interest payment is $18,118.
(c)
Calculate the interest expense on the bond.
Cash interest = $120,000 (2)
Bond discount per interest payment = $18,118 (3)
…
Therefore, the amount of interest expense on the bond is $138,118.
3.
Calculate the total bond interest expense that will be recognized over the life of the bonds.
3.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Calculate the total bond interest expense.
Details | Amount ($) |
Total interest payments for 15 years (30 Semiannual payments) | 3,600,000 (4) |
Add: Discounts | 543,552 (1) |
Total bond interest expense | 4,143,552 |
Table (2)
Working Note:
Calculate the total interest payments for 15 years (semi-annually).
Therefore the total interest payment for 15 years (semi-annually) is $4,143,552.
4.
Prepare an amortization table for the first two years of the bonds using straight-line method to amortize the discount.
4.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Prepare an amortization table for the first two years of the bonds using straight-line method to amortize the discount.
Date | Discount Unamortized ($) | Carrying Amount ($) |
01/01/2015 | 543,552 | 3,456,448 |
30/06/2015 | 525,434 | 3,474,566 |
31/12/2015 | 507,316 | 3,492,684 |
30/06/2016 | 489,198 | 3,510,802 |
31/12/2016 | 471,080 | 3,528,920 |
Table (3)
Note: The amortization of bond discount per interest payment is $18,118 (3).
5.
Prepare the journal entry to record semiannual interest and amortization of discount on bonds.
5.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Prepare journal entry for payment of semiannual interest and amortization of discount on bonds.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2015 | Bond Interest Expense (5) | 138,118 | |||||
June | 30 | Discount on Bonds Payable (3) | 18,118 | ||||
Cash (2) | 120,000 | ||||||
(To record semiannual payment of interest and amortization of discount on bonds) |
Table (4)
Working notes:
Calculate the interest expense on the bond as on June 30, 2015.
- Interest expense is an expense and it decreases the equity value. So, debit it by $138,118.
- Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $18,118.
- Cash is an asset and it is decreased. So, credit it by $120,000
Prepare journal entry for payment of semiannual interest and amortization of discount on bonds.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2015 | Bond Interest Expense (6) | 138,118 | |||||
December | 31 | Discount on Bonds Payable (3) | 18,118 | ||||
Cash (2) | 120,000 | ||||||
(To record semiannual payment of interest and amortization of discount on bonds) |
Table (5)
Working notes:
Calculate the interest expense on the bond as on December 31, 2015.
- Interest expense is an expense and it decreases the equity value. So, debit it by $138,118.
- Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $18,118.
- Cash is an asset and it is decreased. So, credit it by $120,000
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Financial Accounting Fundamentals:
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