Chapter 10, Problem 8PSA

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: Prepare Journal entry to record the bond issuance.

Answer to Problem 8PSA

The time of issuance of bond on discount.

Explanation of Solution

Date	Particular	Debit	Credit
01/01/2016	Cash	$\$292,181$
	Discount on bonds payable	$\$32,819$
	Bonds payable		$\$325,000$
	(Being bonds sold at discount)

Computation of discount is as follows:

  $\begin{array}{l}\begin{array}{l}Discount=ParValue-IssuePrice\hfill \\ Discount=\$325,000-\$292,181\hfill \end{array} \\ Discount=\$32,819\\ \end{array}$

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: Total bond interest expenses to be recognized over the bonds life.

Answer to Problem 8PSA

The total bond interest expense to be recognized over the life of bond is $\$97,819$

Explanation of Solution

  $\begin{array}{l}CashPayment=ParValue\times Rate\times No.ofyears\\ =\$325,000\times 5\%\times 4=\$65,000\end{array}$

  $$

  $\begin{array}{l}Bonds\mathrm{int}erest\exp ense=Cashpayment+Discountamount\\ =(\$65,000+\$32,819)\\ =\$97,819\end{array}$

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: First two years amortization table.

Answer to Problem 8PSA

First two years amortization table, amount check is $\$307,308$

Explanation of Solution

Semi Annual Period End	Unamortized Discount	Carrying Value
01/0 1/2016	$\$32,819$	$\$292,181$
06/30/2016	$\$28,717$	$\$296,283$
12/31/2016	$\$24,615$	$\$300,385$
06/30/2017	$\$20,513$	$\$304,487$
12/31/2017	$\$16,411$	$\$308,589$
30/06/2018	$\$12,309$	$\$312,691$
31/12/2018	$\$8,207$	$\$316,793$
30/06/2019	$\$4,105$	$\$320,895$
31/12/2019	$\$(3)$	$\$324,997$

Straight-line discount amortization = $\$32,819/8$

= $\$4,102$

Summary Introduction

Introduction: When bonds are issued at par, cash is debited and bonds payable is credited for the bond’s par value.Bonds are issued at a discount when the contract price is less than the market price, making the issue price less than par.

To determine: Prepare Journal Entry.

Answer to Problem 8PSA

Journal Entries of First two interest payment

Explanation of Solution

Date	Particular	Debit	Credit
30/06/2016	Interest Expense	$\$97,819$
	Discount on bonds payable		$\$32,819$
	Cash		$\$65,000$
	(Being semiannual interest paid and discount on bonds amortized)
31/12/2016	Interest Expense	$\$97,819$
	Discount on bonds payable		$\$32,819$
	Cash		$\$65,000$
	(Being semiannual interest paid and discount on bonds amortized)