Concept explainers
(1)
Bonds
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Straight-line amortization bond
Early Extinguishment debt
When the debt obligations are retired before its scheduled maturity date, the transactions are referred to as early extinguishment of debt. The debt is paid at the market price of the debt and for any difference between the book value of the debt with its market price, the business recognizes the gain or loss on early extinguishment of the debt.
To Prepare: The
(1)
Explanation of Solution
Prepare journal entry to record the issuance of the bonds as on 30th June 2016.
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
|
2016 | Cash (1) | 383,500 | ||
June | 30 | |||
Debt Issue Costs | 1,500 | |||
Discount on Bonds Payable (2) | 15,000 | |||
Bonds Payable | 400,000 | |||
(To record the issue of bonds) |
Table (1)
Working notes:
Calculate the amount of cash received.
Hence, cash received amount is $383,500.
(1)
Calculate discount on bonds payable.
Hence, discount on bonds payable amount is $15,000.
(2)
- Cash is an asset and it increases by $383,500. Therefore, debit cash account by $383,500.
- Debt issue cost is a contra liability and it decreases by $1,500. Therefore, debit debt issue costs account by $1,500.
- Discount on bonds payable is a contra liability and it decreases by $15,000. Therefore, debit discount on bonds payable account by $15,000.
- Bonds payable is a long-term liability and it increases by $400,000. Therefore, credit bonds payable account by $400,000.
(2)
To Prepare: The journal entry to record the payment of interest and amortization of discount.
(2)
Explanation of Solution
Prepare journal entry to record payment of interest and amortization of discount on December 31, 2016.
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
|||
2016 | Interest Expense (5) | 20,750 | ||||
December | 31 | Discount on Bonds Payable (4) | 750 | |||
Cash (3) | 20,000 | |||||
(To record payment of interest) |
Table (2)
Working notes:
Calculate the amount of interest as on December 31, 2016.
Hence, interest paid amount is $20,000.
(3)
Calculate discount on bonds payable.
Hence, discount on bonds payable amount is $750.
(4)
Calculate the interest expense on the bond as on December 31, 2016.
Hence, interest expense amount is $20,750.
(5)
- Interest Expense is an expense and it decreases the value of equity. Therefore, debit interest expense account by $20,750.
- Discount on bonds payable is a contra liability and it increases by $750. Therefore, credit discount on bonds payable account by $750.
- Cash is an asset and it decreases by $20,000. Therefore, credit cash account by $20,000.
(3)
To Prepare: The journal entry to record payment of interest and amortization of discount on June 30, 2017.
(3)
Explanation of Solution
The following is the journal entry for payment of interest and amortization of discount on June 30, 2017:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
|||
2017 | Interest Expense (9) | 20,750 | ||||
June | 30 | Discount on Bonds Payable (8) | 750 | |||
Cash (7) | 20,000 | |||||
(To record payment of interest) |
Table (4)
Working notes:
Calculate the amount of interest as on June 30, 2017.
Hence, interest paid amount is $20,000.
(7)
Calculate discount on bonds payable.
Hence, discount on bonds payable amount is $750.
(8)
Calculate the interest expense on the bond as on June 30, 2017.
Hence, interest expense amount is $20,750.
(9)
- Interest Expense is an expense and it decreases the value of equity. Therefore, debit interest expense account by $20,750.
- Discount on bonds payable is a contra liability and it increases by $750. Therefore, credit discount on bonds payable account by $750.
- Cash is an asset and it decreases by $20,000. Therefore, credit cash account by $20,000.
(4)
To Prepare: The journal entry to record the call of the bonds.
(4)
Explanation of Solution
The following is the journal entry to record the call of the bonds:
Date | Accounts and Explanations |
Debit ($) |
Credit ($) |
|
2017 | ||||
July | 1 | Bonds Payable | 400,000 | |
Loss on Early Extinguishment of Bonds (13) | 9,850 | |||
Debt Issue Costs (12) | 1,350 | |||
Discount on Bonds Payable (11) | 13,500 | |||
Cash | 395,000 | |||
(To record early extinguishment of bonds) |
Table (6)
Working notes:
Calculate the amount of discount on bonds payable.
Hence, discount on bonds payable amount is $13,500.
(11)
Calculate remaining debt issue costs.
Hence, debt issue costs amount is $1,350.
(12)
Calculate the amount of loss on early extinguishment.
Hence, loss on early extinguishment amount is $9,850.
(13)
- Bonds payable is a liability account. The amount has decreased because the liability is paid off. Therefore, debit bonds payable account with $400,000.
- Loss on early retirement of bonds is an expense account. Loss decrease equity account. Therefore, debit loss on early retirement of bonds account with $9,850.
- Debt issue cost is a liability and it increases by $1,350. Therefore, credit debt issue costs account by $1,350.
- Discount on bonds payable is a contra liability account. The amount is increased because the carrying
value of bonds payable is increased to amortize the discount. Therefore, credit discount on bonds payable account with $13,500. - Cash is an asset account. The amount has decreased because debt is paid; therefore, credit Cash account with $395,000
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Chapter 14 Solutions
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