Chapter 10, Problem 5E

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.

To prepare: Journal entry.

Explanation of Solution

(a)

Issue of bonds at discount on December 31, 2015

Date	Account title and Explanation	Post. Ref.	Debit ($)	Credit ($)
Dec 31	Cash		188,000
	Discount on bonds payable		12,000
	Bonds payable			200,000
	(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.

(b)

Payment of interest on June 30, 2016

Date	Account title and Explanation	Post. Ref.	Debit ($)	Credit ($)
June 30	Bonds interest expense		8,000
	Discount on bonds payable			3,000
	Cash			5,000
	(To record the paid semiannual interest and record amortization)

Table (2)

• 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.

Working notes:

Given,

Unamortized discount on December 31, 2015 is $12,000.

Unamortized discount on June 30, 2016 is $9,000.

Bond value is $200,000.

Rate of interest is 5%.

Time period is 0.5.

Calculation of discount on bond payable:

$\begin{array}{c}\text{Discount on bonds payable}=\left(\begin{array}{l}\text{Unamortized discount on December 31, 2017}\\ -\text{Unamortized discount on June 30, 2017}\end{array}\right)\\ =\$12,000-\$9,000\\ =\$3,000\end{array}$

Calculation of amount cash payment:

$\begin{array}{c}\text{Cash payment}=\text{Bond value}\times \text{Rate of interest}\times \text{Time period}\\ \text{=\$200,000}\times \text{5\%}\times \text{0}\text{.5}\\ \text{=\$5,000}\end{array}$

Payment of interest on December 31, 2016

Date	Account title and Explanation	Post. Ref.	Debit ($)	Credit ($)
Dec 31	Bonds interest expense		8,000
	Discount on bonds payable			3,000
	Cash			5,000
	(To record the paid semiannual interest and record amortization)

Table (3)

• 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.

Working note:

Given,

Unamortized discount on June 30, 2016 is $9,000.

Unamortized discount on December 31, 2016 is $6,000.

Bond value is $200,000.

Rate of interest is 5%.

Time period is 0.5.

Calculation of discount on bond payable:

$\begin{array}{c}\text{Discount on bonds payable}=\left(\begin{array}{l}\text{Unamortized discount on June 30, 2016}\\ -\text{Unamortized discount on December}\text{31,}\text{2016}\end{array}\right)\\ =\$9,000-\$6,000\\ =\$3,000\end{array}$

Calculation of amount cash payment:

$\begin{array}{c}\text{Cash payment}=\text{Bond value}\times \text{Rate of interest}\times \text{Time period}\\ =\$200,000\times 5\%\times 0.5\\ =\$5,000\end{array}$

Payment of interest on June 30, 2017

Date	Account title and Explanation	Post. Ref.	Debit ($)	Credit ($)
June 30	Bonds interest expense		8,000
	Discount on bonds payable			3,000
	Cash			5,000
	(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.

Working notes:

Given,

Unamortized discount on December 31, 2016 is $6,000.

Unamortized discount on June 30, 2017 is $3,000.

Bond value is $200,000.

Rate of interest is 5%.

Time period is 0.5.

Calculation of discount on bond payable:

$\begin{array}{c}\text{Discount on bonds payable}=\left(\begin{array}{l}\text{Unamortized discount on December}\text{31,}\text{2016}\\ -\text{Unamortized discount on June}\text{30,2017}\end{array}\right)\\ =\$6,000-\$3,000\\ =\$3,000\end{array}$

Calculation of amount cash payment,

$\begin{array}{c}\text{Cash payment}=\text{Bond value}\times \text{Rate of interest}\times \text{Time period}\\ =\$200,000\times 5\%\times 0.5\\ =\$5,000\end{array}$

Payment of interest on December 31, 2017

Date	Account title and Explanation	Post. Ref.	Debit ($)	Credit ($)
Dec 31	Bonds interest expense		8,000
	Discount on bonds payable			3,000
	Cash			5,000
	(To record the paid semiannual interest and record amortization)

Table (6)

• 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.

Working notes:

Given,

Unamortized discount on June 30, 2017 is $3,000.

Unamortized discount on December 31, 2017 is $0.

Bond value is $200,000.

Rate of interest is 5%.

Time period is 0.5.

Calculation of discount on bond payable:

$\begin{array}{c}\text{Discount on bonds payable}=\left(\begin{array}{l}\text{Unamortized discount on}\text{June}\text{30,2017}\\ -\text{Unamortized discount on December}\text{31,}\text{2017}\end{array}\right)\\ =\$3,000-\$0\\ =\$3,000\end{array}$

Calculation of amount cash payment:

$\begin{array}{c}\text{Cash payment}=\text{Bond value}\times \text{Rate of interest}\times \text{Time period}\\ =\$200,000\times 5\%\times 0.5\\ =\$5,000\end{array}$

(c)

Sale of bonds at par on December31, 2016

Date	Account title and Explanation	Post. Ref.	Debit ($)	Credit ($)
Dec 31	Bonds payable		200,000
	Cash			200,000
	(To record the maturity and payment of bond)

Table (7)

• Bonds payable is the liabilities account. Here, bonds are mature and paid. The liabilities of the company decreased. So, debit the bonds payable account.

• Cash account is the assets account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.