Chapter 10, Problem 4PSA

Summary Introduction

Introduction: When bonds are issued at par, debit the cash and credit the bonds payable for the bond’s par value.Bonds are issued at a premiumwhen the contract rate is higher than the market price, making the issue price greater than par.

To determine:Compute the bond interest expense over the bonds life.

Answer to Problem 4PSA

The amount of total bond interest expense is $\$75,917$

Explanation of Solution

  $\begin{array}{l}\text{Cash Payment= Par Value}\times \text{Rate}\times \text{ No}\text{. of years}\\ \text{ = \$250,000}\times 6.5\%\times 1/2=\$8,125\end{array}$

Total cash payments of $\$8,125$ is $\$81,250$

  $\begin{array}{l}\text{ Total repaid}=\text{ Total Cash payment + Par value }\\ =(\$81,250+\$250,000)\\ =\$331,250\end{array}$

  $\begin{array}{l}\text{Total Bonds }\mathrm{int}erest\exp ense=\text{ Total repaid - Amount borrowed }\\ =(\$331,250+\$255,333)\\ =\$75,917\end{array}$

b.

Summary Introduction

Introduction: When bonds are issued at par, debit the cash and credit the bonds payable for the bond’s par value.Bonds are issued at a premium when the contract rate is higher than the market price, making the issue price greater than par.

To determine: Amortization table is to be prepared

Answer to Problem 4PSA

Amortization table, amount check is $\$252,668$

Explanation of Solution

  $\begin{array}{l}\begin{array}{l}\mathrm{Pr}emium=Issued\text{ Price}-Par\text{ Value}\hfill \\ \mathrm{Pr}emium=\$255,333-\$250,000\hfill \end{array} \\ \mathrm{Pr}emium=\$5,333\\ \end{array}$

Semi Annual Period End	Unamortized Premium	Carrying Value
01/01/2016	$\$5,333$	$\$255,333$
06/30/2016	$\$4,800$	$\$254,800$
12/31/2016	$\$4,267$	$\$254,267$
06/30/2017	$\$3,734$	$\$253,734$
12/31/2017	$\$3,201$	$\$253,201$
30/06/2018	$\$2,668$	$\$252,668$
31/12/2018	$\$2,135$	$\$252,135$
30/06/2019	$\$1,602$	$\$251,602$
31/12/2019	$\$1,609$	$\$251,069$
30/06/2020	$\$536$	$\$250,536$
31/12/2020	$\$0$	$\$250,000$

c.

Summary Introduction

Introduction: When bonds are issued at par, debit the cash and credit the bonds payable for the bond’s par value.Bonds are issued at a premium when the contract rate is higher than the market price, making the issue price greater than par.

To determine: Prepare Journal Entry.

Answer to Problem 4PSA

Journal Entries of First two interest payment

Explanation of Solution

Date	Particular	Debit	Credit
30/06/2016	Bond interest expense	$\$7,592$
	Premium on bonds payable	$\$533$
	Cash		$\$8,125$
	(Being premium paid on bonds payable)
31/12/2016	Bond interest expense	$\$7,592$
	Premium on bonds payable	$\$533$
	Cash		$\$8,125$
	(Being premium paid on bonds payable)