Chapter 12, Problem 12.4APR

1.

To determine

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.

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

Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note.

To Journalize: The entries to record the transactions.

Explanation of Solution

Journalize the entries to record the transactions.

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2016	Cash		63,532,267
July  1	Discount on Bonds Payable (1)		10,467,733
	Bonds Payable			74,000,000
	(To record issue of bonds at discount)
October 1	Cash		200,000
	Notes Payable			200,000
	(To record issue of 6% notes for cash)
December 31	Interest Expense		3,000
	Interest Payable			3,000
	(To record interest accrued on installment note)
December 31	Interest Expense (4)		4,331,693
	Discount on Bonds Payable (2)			261,693
	Cash (3)			4,070,000
	(To record semiannual interest payment and amortization on bonds)

Table (1)

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2017	Interest Expense (4)		4,331,693
June 30	Discount on Bonds Payable (2)			261,693
	Cash (3)			4,070,000
	(To record semiannual interest payment and amortization on bonds)
September 30	Interest Expense		9,000
	Interest Payable		3,000
	Notes Payable		28,673
	Cash			40,673
	(To record the annual payment on note)
December 31	Interest Expense		2,570
	Interest Payable			2,570
	To record interest accrued on installment note)
December 31	Interest Expense (4)		4,331,693
	Discount on Bonds Payable (2)			261,693
	Cash (3)			4,070,000
	(To record semiannual interest payment and amortization on bonds)

Table (2)

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2018	Bonds Payable		74,000,000
June 30	Loss on Redemption of Bonds (6)		7,940,961
	Discount on Bonds Payable			9,420,961
	Cash (5)			72,520,000
	(To record redemption of bonds)
September 30	Interest Expense		7,710
	Interest Payable		2,570
	Notes Payable		30,393
	Cash			40,673
	(To record the annual payment on note)

Table (3)

Working notes:

Calculate discount on bonds payable.

$\begin{array}{c}\text{Discount on bonds payable = }\left(\begin{array}{l}\text{Face value }\\ -\text{ Cash received}\end{array}\right)\\ =\$74,000,000-\$63,532,267\\ =\$10,467,733\end{array}$ (1)

Calculate discount on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable }\\ \text{semiannually}\end{array})\text{=}\frac{\text{Discount}\text{on}\text{bonds}\text{payable}\text{per}\text{year}}{\text{Number}\text{of}\text{semiannual}}\\ \text{=}\frac{\$10,467,733}{40}\\ \text{=}\text{\$261,693 }\end{array}$ (2)

Calculate the amount of cash interest.

$\begin{array}{c}\text{ Cash interest = }\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\times \\ \text{Interest}\text{time}\text{period}\end{array}\right)\\ =\$74,000,000\times 11\%\times \frac{6}{12}\\ =\$4,070,000\end{array}$ (3)

Calculate the interest expense on the bond.

$\begin{array}{c}\text{Interest expense = Cash interest + Discount on bonds payable}\\ =\$4,070,000+\$261,693\\ =\$4,331,693\end{array}$ (4)

Calculate cash paid to redeem the bonds.

$\begin{array}{c}\text{ Cash paid to redeem the bonds = Face value}\times 0.98\\ \text{= \$74,000,000}\times 0.98\\ \text{=}\text{\$72,520,000}\end{array}$ (5)

Compute loss on the redemption of the bonds payable.

$\begin{array}{c}\begin{array}{l}\text{Loss on redemption}\\ \text{ of bonds payable}\end{array}\}=\left(\begin{array}{l}\text{Cash paid to redeem the bonds}\\ +\text{Discount}\text{on}\text{bonds}\text{payable}\end{array}\right)–\text{Bonds payable}\\ =\$72,520,000+\$9,420,961–\$74,000,000\\ =\$7,940,961\end{array}$ (6)

2016:

• On July 1, Cash is debited as it increased the asset. Discount on bonds payable is debited as it decreased the liability. Bonds payable is credited as it increased the liability.
• On October 1, Cash is debited as it increased the asset. Notes payable is credited as it increased the liability.
• On December 31, interest expense is debited as it decreases the equity value. Interest payable is credited as it increased the liability.
• On December 31, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.

2017:

• On June 30, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
• On September 30, interest expense is debited as it decreases the equity value. Interest payable and notes payable are debited as it decreased the liability. Cash is credited as it decreased the asset.
• On December 31, interest expense is debited as it decreases the equity value. Interest payable is credited as it increased the liability.
• On December 31, interest expense is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.

2018:

• On June 30, Bonds payable is debited as it decreased liability. Loss on redemption of bonds is debited as it decreases the equity value. Discount on bonds payable is credited as it increased the liability. Cash is credited as it decreased the asset.
• On September 30, interest expense is debited as it decreases the equity value. Interest payable and notes payable are debited as it decreased the liability. Cash is credited as it decreased the asset.

2.

a.

To determine

The amount of interest expense in 2016.

Explanation of Solution

Determine the amount of interest expense in 2016.

$\begin{array}{c}\text{Total interest expense in Year 1 = \$3,000 +\$4,331,693}\\ \text{=}\text{\$4,334,693}\end{array}$

Conclusion

Hence, the amount of total interest expense in 2016 is $4,334,693.

b.

To determine

The amount of interest expense in 2017.

Explanation of Solution

Determine the amount of interest expense in 2017.

$\begin{array}{c}\text{Total interest expense in Year 2 = \$4,331,693 +\$9,000 +\$2,570 + \$4,331,693}\\ \text{=}\text{\$8,674,956}\end{array}$

Conclusion

Hence, the amount of total interest expense in 2017 is $8,674,956.

3.

To determine

  The carrying amount of bonds as of December 31, 2017.

Explanation of Solution

Determine the carrying amount of bonds as of December 31, 2017.

Particulars	Amount ($)
Initial carrying amount of bonds	63,532,267
Discount amortized on December 31, 2016	261,693
Discount amortized on June 30, 2017	261,693
Discount amortized on December 31, 2017	261,693
Carrying amount of bonds, December 31, 2017	64,317,346

Table (4)

Conclusion

The carrying amount of bonds as of December 31, 2017 is $64,317,346