Chapter 10, Problem 6CP

1.

To determine

Calculate the cash received from issuance of bonds.

Answer to Problem 6CP

The cash received from issuance of bonds is $624,000.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Calculate the cash received from issuance of bonds.   

$\begin{array}{c}\text{Cash}\text{received}\text{from}\text{issuance}\text{of}\text{bonds}=\text{Face}\text{value}\text{of}\text{bonds}\text{×}\text{Issue}\text{price}\text{of}\text{bonds}\\ \text{=}\text{\$600,000}\times \frac{104}{100}\\ \text{=}\text{\$624,000}\end{array}$

Conclusion

Therefore, the cash received from issuance of bonds is $624,000.

2.

To determine

Prepare journal entry to record issuance of bonds payable.

Explanation of Solution

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a higher price than the face value.

Straight-line amortization method: It is a method of bond amortization that spreads the amount of the bond discount or premium equally over the interest period.

Prepare journal entry for issuance of bonds payable on January 1, 2018.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 1, 2018	Cash		624,000
	Premium on Bonds Payable (1)			24,000
	Bonds Payable			600,000
	(To record bonds issued at premium)

Table (1)

• Cash is an asset and it increases the value of assets. So, debit it by $624,000.
• Premium on Bonds Payable is an adjunct liability account and it increases the value of liabilities. So, credit it by $24,000.
• Bonds payable is a liability and it increases the value of liabilities. So, credit it by $600,000.

Working note (1):

Calculate premium on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable}=\text{Cash}\text{received}–\text{Face value of bonds}\\ =\$624,000–\$600,000\\ =\$24,000\end{array}$

3.

To determine

Prepare journal entries to record the interest payment on December 31, 2018 and 2019.

Explanation of Solution

Prepare journal entry for the payment of interest and amortization of premium on bonds on December 31, 2018.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2018	Interest Expense(4)		49,200
	Premium on Bonds Payable (2)		4,800
	Cash (3)			54,000
	(To record the first payment of interest expense and amortization of premium on bonds)

Table (2)

• Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $49,200.
• Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $4,800.
• Cash is an asset and it decreases the value of assets. So, credit it by $54,000.

Working note (2):

Calculate the premium on bonds payable annually.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{annually}\end{array}\}=\left(\frac{\text{Premium on bonds payable per year}}{\text{Number}\text{of}\text{Years}}\right)\\ =\frac{\$24,000}{5}\\ =\$4,800\end{array}$   

Working note (3):

Calculate the amount of cash interest payment.

$\begin{array}{c}\text{Cash interest payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times \frac{9}{100}\times \frac{12}{12}\\ =\$54,000\end{array}$   

Working note (4):

Calculate the interest expense on the bond.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest payment }-\text{ Premium}onBondsPayable\\ =\$54,000-\$4,800\\ =\$49,200\end{array}$

Prepare journal entry for the payment of interest and amortization of premium on bonds on December 31, 2019.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2019	Interest Expense (7)		49,200
	Premium on Bonds Payable  (5)		4,800
	Cash (6)			54,000
	(To record second payment of interest expense and amortization of premium on bonds)

Table (3)

• Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $49,200.
• Premium on Bonds Payable is an adjunct liability account and it decreases the value of liabilities. So, debit it by $4,800.
• Cash is an asset and it decreases the value of assets. So, credit it by $54,000.

Working note (5):

Calculate the premium on bonds payable annually.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable}\\ \text{annually}\end{array}\}=\left(\frac{\text{Premium on bonds payable per year}}{\text{Number}\text{of}\text{Years}}\right)\\ =\frac{\$24,000}{5}\\ =\$4,800\end{array}$

Working note (6):

Calculate the amount of cash interest payment.

$\begin{array}{c}\text{Cash interest payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times \frac{9}{100}\times 1\\ =\$54,000\end{array}$   

Working note (7):

Calculate the interest expense on the bond.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest payment }-\text{ Premium}onBondsPayable\\ =\$54,000-\$4,800\\ =\$49,200\end{array}$

4.

To determine

Calculate the interest expense that would be reported on the income statements for 2018 and 2019, and show the presentation of bonds that would be reported on the balance sheet at December 31, 2018 and 2019.

Explanation of Solution

Calculate the interest expense that would be reported on the income statements for 2018 and 2019 as follows:

The amount of interest expense that would be reported on the income statements for 2018 and 2019 is $49,200 (refer working note 4 and 7).

The presentation of bonds that would be reported in on the balance sheet is as shown below:

Corporation S Balance Sheet (Partial) As of December 31
Long-term Liabilities:	2018	2019
Bonds Payable	$600,000	$600,000
Add: Premium on bonds payable	19,200 (8)	14,400 (9)
Carrying Value	619,200	$614,400

Table (4)

Working note (8):

Calculate the premium on bonds payable for 2018.

$\begin{array}{c}\text{Premium on bonds payable for 2018 =}\left(\begin{array}{l}\text{Premium bonds payable at the time of purchase}-\\ \text{Premium on bond paid during the year 2018}\end{array}\right)\\ =\$24,000-\$4,800\\ =\$19,200\end{array}$

Working note (9):

Calculate the premium on bonds payable for 2019.

$\begin{array}{c}\text{Premium on bonds payable =}\left[\begin{array}{l}\text{Preminum on bond payable for 2018}-\\ \text{Premium on bond paid durint the year 2019}\end{array}\right]\\ =\$19,200\text{ (8) }-\$4,800\\ =\$14,400\end{array}$