Chapter 10, Problem 3PSA

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		4,859,980
	Premium on bonds payable			895,980
	Bonds payable			4,000,000
	(To record the sold 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

Cash payment, straight line amortization and bonds interest expense.

Explanation of Solution

(a)

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 account is $120,000.

(b)

Given,

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

Issued price of bond is $4,895,980.

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, $895,980 for the discount on bond and 30 for number of semiannual period,

$\begin{array}{c}\text{Amortization(straight}\text{line}\text{discount)}=\frac{\$895,980}{30\text{semi}\text{annual}\text{period}}\\ =\frac{\$895,980}{30\text{semi}\text{annual}\text{period}}\\ =\$29,866\end{array}$

Hence, amortization is $29,866.

Working note:

Calculation of discount on bond,

$\begin{array}{c}\text{Discount}\text{on}\text{bond}=\text{Issued}\text{price}\text{of}\text{bond}-\text{Par}\text{value}\text{of}\text{bond}\\ =\text{\$4,895,980}-\text{\$4,000,000}\\ =\text{\$895,980}\end{array}$

(c)

Given,

Cash payment is $120,000.

Amortization expense is $29,866.

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 $29,866 for amortization.

  $\begin{array}{c}\text{Bonds}\text{interest}\text{expense}=\$120,000-\$29,866\\ =\$90,134\end{array}$

Hence, bonds interest expense is $90,134.

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	4,895,980
Bond interest expense	2,704,020

Table (2)

Hence, total bond interest expense is $2,704,202.

4.

To determine

First two year of an amortization table.

Explanation of Solution

End of semiannual period	UnamortizedDiscount($)	Carrying value($)
January 1, 2017	895,980	4,895,980
June 30, 2017	866,114	4,866,114
December 31, 2017	836,248	4,836,248
June 30 ,2018	806,382	4,806,382
December 31, 2018	776,516	4,775,516

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		90,134
	Premium on bonds payable		29,866
	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
• 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		90,134
	Premium on bonds payable		29,866
	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
• 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.