Chapter 12, Problem 12.4BPR

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		62,817,040
July  1	Premium on Bonds Payable (1)			7,817,40
	Bonds Payable			55,000,000
	(To record issue of bonds at premium)
October 1	Cash		450,000
	Notes Payable			450,000
	(To record issue of 6% notes for cash)
December 31	Interest Expense		9,000
	Interest Payable			9,000
	(To record interest accrued on installment note)
December 31	Interest Expense (4)		2,084,148
	Premium on Bonds Payable (2)		390,852
	Cash (3)			2,475,000
	(To record semiannual interest payment and amortization on bonds)

Table (1)

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2017	Interest Expense (4)		2,084,148
June 30	Premium on Bonds Payable (2)		390,852
	Cash (3)			2,475,000
	(To record semiannual interest payment and amortization on bonds)
September 30	Interest Expense		27,000
	Interest Payable		9,000
	Notes Payable		61,342
	Cash			97,342
	(To record the annual payment on note)
December 31	Interest Expense		7,773
	Interest Payable			7,773
	To record interest accrued on installment note)
December 31	Interest Expense (4)		2,084,148
	Premium on Bonds Payable (2)		390,852
	Cash (3)			2,475,000
	(To record semiannual interest payment and amortization on bonds)

Table (2)

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2018	Bonds Payable		55,000,000
June 30	Premium on Bonds Payable		6,253,632
	Gain on Redemption of Bonds (6)			4,603,632
	Cash (5)			56,650,000
	(To record redemption of bonds)
September 30	Interest Expense		23,320
	Interest Payable		7,773
	Notes Payable		66,249
	Cash			97,342
	(To record the annual payment on note)

Table (3)

Working notes:

Calculate discount on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable = }\left(\begin{array}{l}\text{Cash received}\\ -\text{Face value }\end{array}\right)\\ =\$62,817,040-\$55,000,000\\ =\$7,817,040\end{array}$ (1)

Calculate premium on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Premium on bonds payable }\\ \text{semiannually}\end{array})\text{=}\frac{\text{Premium}\text{on}\text{bonds}\text{payable}}{\text{Number}\text{of}\text{semiannual}}\\ \text{=}\frac{\$7,817,040}{20}\\ \text{=}\text{\$390,852 }\end{array}$ (2)

Calculate the amount of cash interest.

$\begin{array}{c}\text{ Cash interest = }\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\times \\ \text{Interest}\text{time}\text{period}\end{array}\right)\\ =\$55,000,000\times 9\%\times \frac{6}{12}\\ =\$2,475,000\end{array}$ (3)

Calculate the interest expense on the bond.

$\begin{array}{c}\text{Interest expense = Cash interest }-\text{ Premium on bonds payable}\\ =\$2,475,000-\$390,852\\ =\$2,084,148\end{array}$ (4)

Calculate cash paid to redeem the bonds.

$\begin{array}{c}\text{ Cash paid to redeem the bonds = Face value}\times 1.03\\ \text{= \$55,000,000}\times 1.03\\ \text{=}\text{\$56,650,000}\end{array}$ (5)

Compute gain on the redemption of the bonds payable.

$\begin{array}{c}\begin{array}{l}\text{Gain on redemption}\\ \text{ of bonds payable}\end{array}\}=\left(\begin{array}{l}\text{Bonds payable}\\ +\text{Premium}\text{on}\text{bonds}\text{payable}\end{array}\right)–\text{Cash paid to redeem the bonds}\\ =\$55,000,000+\$6,253,632–\$56,650,000\\ =\$4,603,632\end{array}$ (6)

2016:

• On July 1, Cash is debited as it increased the asset. Premium on bonds payable is credited as it increased 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. Premium on bonds payable is debited as it decreased the liability. Cash is credited as it decreased the asset.

2017:

• On June 30, interest expense is debited as it decreases the equity value. Premium on bonds payable is debited as it decreased 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. Premium on bonds payable is debited as it decreased the liability. Cash is credited as it decreased the asset.

2018:

• On June 30, Bonds payable is debited as it decreased liability. Premium on bonds payable is debited as it decreased the liability. Gain on redemption of bonds is credited as it increases the equity value. 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.

$\begin{array}{c}\text{Total interest expense in 2016 = \$9,000 +\$2,084,148}\\ \text{=}\text{\$2,093,148}\end{array}$

Conclusion

Hence, the amount of total interest expense in 2016 is $2,093,148.

b.

To determine

The amount of interest expense in 2017.

Explanation of Solution

Determine the amount of interest expense in 2017.

$\begin{array}{c}\text{Total interest expense in 2017 = \$2,084,148 +\$27,000 +\$7,773 + \$2,084,148}\\ \text{=}\text{\$4,203,069}\end{array}$

Conclusion

Hence, the amount of total interest expense in 2017 is $4,203,069.

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	62,817,040
Premium amortized on December 31, 2016	(390,852)
Premium amortized on June 30, 2017	(390,852)
Premium amortized on December 31, 2017	(390,852)
Carrying amount of bonds, December 31, 2017	61,644,484

Table (4)

Conclusion

The carrying amount of bonds as of December 31, 2017 is $61,644,484