Chapter 10, Problem 2PSA

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.

Journal entry to record the bonds’ issuance.

Explanation of Solution

Issue of bonds at discount on January 1, 2017

Date	Account Title and Explanation	Post.Ref.	Debit($)	Credit($)
January 1	Cash		3,456,448
	Discount on bonds payable		543,552
	Bonds payable			4,000,000
	(To record the sold bonds at discount)

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.
• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which decrease the liabilities of the company. So, debit the discount 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

Cash payment, straight line amortization and bonds interest expense.

Explanation of Solution

Given,

Amount of bond is $4,000,000.

Rate of interest is 6%.

Time period is 0.5.

Formula to calculate the cash at the time of issue of bond,

$\text{Cash}\text{payment}=\text{Bond}\text{value}\times \text{Rate}\text{of}\text{interest}\times \text{Time}\text{period}$

Substitute, $4,000,000 for the bond value, 6% for the rate on interest and 0.5 for time period.

$\begin{array}{c}\text{Cash}\text{payment}=\text{\$4,000,000}\times \text{6\%}\times \text{0}\text{.5}\\ =\text{\$120,000}\end{array}$

Hence, cash payment is $120,000.

(b)

Given,

Par value of bond is $4,000,000.

Issued price of bond is $3,456,448.

Number of semiannual period is 30.

Formula to calculate the straight line discount amortization,

$\text{Amortization(straight}\text{line}\text{discount)}=\frac{\text{Discount}\text{on}\text{bond}}{\text{Number}\text{of}\text{semi}\text{annual}\text{period}}$

Substitute, $543,552 for the discount on bond and 30 for number of semiannual period,

$\begin{array}{c}\text{Amortization(straight}\text{line}\text{discount)}=\frac{\$543,552}{30\text{semi}\text{annual}\text{period}}\\ =\frac{\$543,552}{30\text{semi}\text{annual}\text{period}}\\ =\$18,118\end{array}$

Hence, amortization is $18,118.

Working note:

Calculation of discount on bond,

$\begin{array}{c}\text{Discount}\text{on}\text{bond}=\text{Par}\text{value}\text{of}\text{bond}-\text{Issued}\text{price}\text{of}\text{bond}\\ =\text{\$4,000,000}-\text{\$3,456,448}\\ =\text{\$543,552}\end{array}$

(c)

Given,

Cash payment is $120,000.

Amortization expense is $18,118.

Formula to calculate bonds interest payment expense,

$\text{Bonds}\text{interest}\text{expense}=\text{Cash}\text{payment}+\text{Amortization}$

Substitute, $120,000 for cash payment and $18,118 for amortization,

$\begin{array}{c}\text{Bonds}\text{interest}\text{expense}=\$120,000+\$18,118\\ =\$138,118\end{array}$

Hence, bonds interest expense is $138,118.

3.

To determine

Total amount of interest payable on bond.

Explanation of Solution

Particulars	Amounts($)
30 Regular outlays of $120,000	3,600,000
Par value at maturity	4,000,000
Net repaid	7,600,000
Less: money borrowed	3,456,448
Bond interest expense	4,143,552

Table (2)

Hence, total bond interest expense is $4,143,552.

4.

To determine

First two year of an amortization table.

Explanation of Solution

End of semiannual period	UnamortizedDiscount($)	Carrying value($)
January 1, 2017	543,552	3,456,448
June 30, 2017	525,434	3,474,566
December 31, 2017	507,316	3,492,684
June 30 ,2018	489,198	3,510,802
December 31, 2018	471,080	3,528,920

Table (3)

5.

To determine

Journal entry to record the first two interest payment.

Explanation of Solution

Payment of interest on June 30, 2017

Date	Account Title and Explanation	Post.Ref.	Debit($)	Credit($)
June 30	Bonds interest expense		138,118
	Discount on bonds payable			18,116
	Cash			120,000
	(To record the paid semiannual interest and record 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
• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount 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		138,118
	Discount on bonds payable			18,116
	Cash			120,000
	(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
• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which increases the liabilities of company. So, credit the discount 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.