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a.
Prepare a
a.
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Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Journalize the entry for the issue of bonds:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
Year 1 | Cash (2) | 518,750 | |
May 1 | Bonds payable | 500,000 | |
Interest Payable (1) | 18,750 | ||
(To record 9%, $500,000 bonds at face value with accrued interest.) |
Table (1)
- Cash is an asset and it is increased. Therefore cash is debited by $518,750.
- Bonds payable is a liability and it is increased. Therefore credit bonds payable account by $500,000.
- Interest payable is a liability and it is increased. Therefore credit interest payable account by $18,750.
Calculate the accrued interest as of October 1:
Note: Interest time period = 5 months (May 1 to October 1)
(1)
Calculate the amount of cash received from the issue of bonds with accrued interest:
Particulars | Amount |
Face value | $500,000 |
Add: Accrued interest | $18,750 (1) |
Cash received with accrued interest | $518,750 |
Table (2)
(2)
b.
Record the payment of semiannual interest on November 1 in the journal entry.
b.
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Explanation of Solution
Journalize the entry for the payment of semiannual interest on November 1:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
Year 1 | Interest Expense (3) | 3,750 | |
November 1 | Interest Payable | 18,750 | |
Cash (4) | 22,500 | ||
(To record payment of semiannual interest.) |
Table (3)
- Interest Expense is a component of stockholders’ equity and there is an increase in the interest expense account which decreased the stockholders’ equity. Therefore debit interest expense account by $3,750.
- Interest payable is a liability and it is decreased. Therefore debit interest payable account by $18,750.
- Cash is an asset and it is decreased. Therefore credit cash account by $22,500.
Working note:
Calculate the interest expense for October:
Note: Interest time period = 1 month (October 1 to November 1)
(3)
Calculate the amount of cash to be for the first semiannual interest:
Particulars | Amount |
Interest Payable | $18,750 (1) |
Add: Interest Expense | $3,750 (2) |
Cash received with accrued interest | $22,500 |
Table (4)
(4)
c.
Prepare a journal entry to record the accrued interest expense on December 31, year 1.
c.
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Explanation of Solution
Journalize the entry to record the journal entry for interest accrual on December 31:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
Year 1 | Interest Expense (5) | 7,500 | |
December 31 | Interest Payable | 7,500 | |
(To record accrual of interest expense.) |
Table (5)
- Interest Expense is a component of stockholders’ equity and there is an increase in the interest expense account which decreased the stockholders’ equity. Therefore debit interest expense account by $7,500.
- Interest payable is a liability and it is increased. Therefore credit interest payable account by $7,500.
Working Notes:
Calculate the amount of interest as on December 31, 2011.
Note: Interest time period = 2 months (November 1 to December 31)
(5)
d.
Prepare journal entry to record the payment of semiannual interest on May 1, Year 2.
d.
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Explanation of Solution
Journalize the entry to record the journal entry for payment of semiannual interest on 1:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
Year 2 | Interest Expense (6) | 15,000 | |
May 1 | Interest Payable | 7,500 | |
Cash | 22,500 | ||
(To record payment of semiannual interest.) |
Table (6)
- Interest Expense is a component of stockholders’ equity and there is an increase in the interest expense account which decreased the stockholders’ equity. Therefore debit interest expense account by $15,000.
- Interest payable is a liability and it is decreased. Therefore debit interest payable account by $7,500.
- Cash is an asset and it is decreased. Therefore credit cash account by $22,500
Working Notes:
Calculate the amount of interest as on May 1, Year 2:
Note: Interest time period = 4 months (December 31 May 1)
(6)
e.
Prepare the journal entry for the retirement of bonds payable before maturity.
e.
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Explanation of Solution
Record the journal entry:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
Year 2 | Bonds Payable | 300,000 | |
May 1 | Loss on Retirement of Bonds Payable (7) | 3,000 | |
Cash | 303,000 | ||
(To record 9%, $500,000 bonds at face value with accrued interest.) |
Table (7)
- Bonds Payable is a liability and it is decreased. Therefore debit bonds payable account by $300,000.
- Loss on Retirement of Bonds Payable is a component of
stockholders equity and there is an increase in the loss on retirement of bonds payable which decreases the stockholders’ equity account. Therefore debit loss on retirement of bonds payable account by $3,000. - Cash is an asset account and it is decreased. Therefore credit cash account by $303,000.
Working note:
Calculate the loss on retirement of bonds payable:
Particulars | Amount |
Cash to be paid at the time of bond retirement | $303,000 |
Face | $300,000 |
Loss on Retirement of Bonds Payable | $3,000 |
Table (8)
(7)
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Chapter 10 Solutions
Financial Accounting for Undergraduates
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