
1.
Prepare the
1.

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.

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.

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.

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.

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
Want to see more full solutions like this?
Chapter 10 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS W/CO
- Please answer the following requirements on these accounting questionarrow_forwardfinancial accounting questionarrow_forwardLambert Manufacturing uses a predetermined overhead rate of $20.50 per direct labor hour. This predetermined rate was based on a cost formula that estimates $252,500 of total manufacturing overhead for an estimated activity level of 12,300 direct labor hours. The company incurred actual total manufacturing overhead costs of $246,000 and 11,700 total direct labor hours during the period. Determine the amount of underapplied or overapplied manufacturing overhead for the period.arrow_forward
- General accountingarrow_forwardYour firm has net income of $420 on total sales of $1,600. Costs are $900, and depreciation is $150. The tax rate is 28%. The firm does not have interest expenses. What is the operating cash flow (OCF)? A) $570 B) $560 C) $420 D) $600arrow_forwardAt the end of the year, Tech Solutions Inc. reported total assets of $200,000 and total liabilities of $85,000. What is the total equity for Tech Solutions Inc. at year-end? A) $285,000 B) $115,000 C) $85,000 D) $200,000arrow_forward
- Financial accounting questionarrow_forwardBrightClean Car Wash reviewed its water bill and found that the highest bill was $5,000 when they washed 500 cars, and the lowest bill was $3,200 when they washed 300 cars. What is the variable cost per car associated with the water bill? A) $8.00 B) $9.00 C) $7.50 D) $8.50arrow_forwardwhat was the stockholders' equity at year-end? accounting questionarrow_forward
- what was the stockholders' equity at year-endarrow_forwardGeneral Account tutor please find solutionarrow_forwardHamilton Textiles has the following data: • Beginning raw materials inventory = $90,000 Materials purchased = $55,000 Ending raw materials inventory = $75,000 Calculate the cost of raw materials used.arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





