Chapter 10, Problem 5PSB

1.

To determine

To prepare:

Journal entry to record the bonds’ issuance.

Explanation of Solution

Issue of bonds at discount on January 1, 2015

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1	Cash		198,494
	Discount on bonds payable		41,506
	Bonds payable			240,000
	(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.

Working Note:

Given,

Value of bonds is $240,000.

Market value of bonds is $198,494.

Calculation of amount of the discount on bonds payable:

$\begin{array}{c}\text{Discount}\text{on}\text{bonds}=\text{Value}\text{of}\text{bond}-\text{Market}\text{value}\text{of}\text{bond}\\ =\text{\$240},000-\$198,494\\ =\$41,506\end{array}$

2.

To determine

Net expense of interest on bond.

Explanation of Solution

Prepare table to compute interest expense as follow:

Particulars	Amounts ($)
Amount repaid:
Interest payment	216,000
Add: Maturity value	240,000
Repaid amount	456,000
Less: Borrowed amount	198,494
Net expense of interest on bond	257,506

Table (2)

Hence, net expense interest on bond is $257,506.

Working notes:

Given,

Value of bond is $240,000.

Rate of interest is 6%.

Time period is 0.5.

Calculation of amount of the interest paid at semiannual period:

$\begin{array}{c}\text{Interest}\text{amount}=\text{Value}\text{of}\text{the}\text{bond}\times \text{Rate}\text{of}\text{interest}\times \text{Time}\text{period}\\ =\text{\$240,000}\times 6\text{\%}\times \text{0}\text{.5}\\ =\$7,200\end{array}$

Calculation of amount of interest repaid:

$\begin{array}{c}\text{Interest}\text{payment}=\text{Interest}\text{semiannual}\text{amount}\times \text{Number}\text{of}\text{payment}\text{period}\\ =\$7,200\times 30\\ =\$216,000\end{array}$

3.

To determine

First two year of an amortization table.

Explanation of Solution

Prepare table to compute unamortized discount, and carrying value as follow:

End of semiannual period	Unamortized Discount ($)	Carrying Value ($)
January 1, 2015	41,506	198,494
June 30, 2015	40,122	199,878
December 31, 2015	38,738	201,262
June 30, 2016	37,354	202,646
December 31, 2016	35,970	204,030

Table (3)

Hence, unamortized discount on December 31, 2016 is $35,970 and carrying value account is $204,030.

4.

To determine

To prepare:

Journal entry to record the first two interest payment.

Explanation of Solution

Payment of interest on June 30, 2015

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
June 30	Bonds interest expense		8,584
	Discount on bonds payable			1,384
	Cash			7,200
	(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, 2015

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
Dec 31	Bonds interest expense		8,584
	Discount on bonds payable			1,384
	Cash			7,200
	(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.

Working note:

Given,

Unamortized capital on January 1, 2015 is 41,506.

Semiannual period is 30.

Calculation of unamortized discount:

$\begin{array}{c}\text{Unamortized}\text{discount}=\frac{\text{Unamortized}\text{discount}\text{on}\text{January}\text{2015}}{\text{Number}\text{of}\text{semiannual}\text{period}}\\ =\frac{\$41,506}{30}\\ =\$1,384\end{array}$

5.

To determine

Change affect the amount reported on legacy’s financial statement.

Explanation of Solution

• If the bonds are issued at the 4% instead of the 8%, then bonds will be issued at premium. As the rate of interest on account for 5% which is more than rate of return in the new market.

• The change in the market rate of interest increases the bond liability of the company in the balance sheet. But, the bond liability decreases gradually with amortization of the premium.

• In this case, the cash flow statement will show greater amount pertain to receipt of the cash during the year under the borrowing head.

Working Note:

Given,

Total discount on bonds payable is $32,819.

Number of payment is 8.

Calculation of discount on bond payable on the first two bond expense:

$\begin{array}{c}\text{Discount}\text{on}\text{bond}\text{payable}=\frac{\text{Total}\text{discount}\text{on}\text{bond}\text{payable}}{\text{Number}\text{of}\text{payment}}\\ =\frac{\$32,819}{8}\\ =\$4,102\end{array}$