Chapter 14, Problem 16E

1.

To determine

Prepare journal entry to record the issuance of the bonds as on 1^st November 2016.

Explanation of Solution

Bonds:

Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Prepare journal entry to record the issuance of the bonds as on 1^st November 2016.

Date	Account titles and Explanation	Debit	Credit
November 1, 2016	Cash (1)	$103,000
	Premium on bonds payable (balancing figure)		$3,000
	Bonds payable		$100,000
	(To record issuance of bonds)

Table (1)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $103,000.
• Premium on bonds payable is an adjunct liability, and it is increased. Therefore, credit premium on bonds payable account for $3,000.
• Bonds payable is a liability, and it is increased. Therefore, credit bonds payable account for $100,000.

Working note:

(1)Calculate cash proceeds.

$\begin{array}{c}\text{Cash =}\text{Face value of bonds}\times \text{Interest rate}\\ \text{=}\text{\$100,000}\times \text{103\%}\\ \text{=}\$103,000\end{array}$

2.

To determine

Prepare journal entries to record the interest expense during the year 2017.

Explanation of Solution

Prepare journal entry to record interest expense as on 1^st May 2017.

Date	Account titles and Explanation	Debit	Credit
May 1, 2017	Interest expense (balancing figure)	$4,850
	Premium on bonds payable (3)	$150
	Cash (2)		$5,000
	(To record interest expense)

Table (2)

• Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $4,850.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $150.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $5,000.

Working notes:

(2)Calculate cash paid.

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds}\times \text{ Interest rate}\times \text{Time period}\\ \text{=}\text{\$100,000}\times \text{10\%}\times \frac{6}{12}\\ =\$5,000\end{array}$

(3)Calculate premium on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable =}\frac{\text{Total premium on bonds}}{\text{life of bonds}}\times \text{Time period}\\ \text{=}\frac{\$3,000}{120\text{months}}\times 6\text{months}\\ \text{=}\text{\$150}\end{array}$

Prepare journal entry to record interest expense as on 1^st November 2017.

Date	Account titles and Explanation	Debit	Credit
November 1, 2017	Interest expense (balancing figure)	$4,850
	Premium on bonds payable (5)	$150
	Cash (4)		$5,000
	(To record interest expense)

Table (3)

• Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $4,850.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $150.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $5,000.

Working notes:

(4)Calculate cash paid.

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds}\times \text{ Interest rate}\times \text{Time period}\\ \text{=}\text{\$100,000}\times \text{10\%}\times \frac{6}{12}\\ =\$5,000\end{array}$

(5)Calculate premium on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable =}\frac{\text{Total premium on bonds}}{\text{life of bonds}}\times \text{Time period}\\ \text{=}\frac{\$3,000}{120\text{months}}\times 6\text{months}\\ \text{=}\text{\$150}\end{array}$

Prepare journal entry to record adjusting entry for accrued interest as on 31^st December 2017.

Date	Account titles and Explanation	Debit	Credit
December 31, 2017	Interest expense (balancing figure)	$1,616.67
	Premium on bonds payable (7)	$50
	Interest payable (6)		$1,666.67
	(To record adjusting entry for accrued interest)

Table (4)

• Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $1,616.67.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $50.
• Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $1,666.67.

Working notes:

(6)Calculate interest payable.

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds}\times \text{ Interest rate}\times \text{Time period}\\ \text{=}\text{\$100,000}\times \text{10\%}\times \frac{2}{12}\\ =\$1,666.67\end{array}$

 (7)Calculate premium on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable =}\frac{\text{Total premium on bonds}}{\text{life of bonds}}\times \text{Time period}\\ \text{=}\frac{\$3,000}{120\text{months}}\times 2\text{months}\\ \text{=}\text{\$50}\end{array}$

3.

To determine

Prepare journal entry to record the retirement of $20,000 of the bonds on 1^st February 2018.

Explanation of Solution

Prepare journal entry to record reversing entry for accured interest as on 1^st February 2021.

Date	Account titles and Explanation	Debit	Credit
February 1, 2018	Interest expense (balancing figure)	$485.00
	Premium on bonds payable (9)	$15
	Interest payable (8)		$500.00
	(To record adjusting entry for accrued interest)

Table (5)

• Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $485.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $15.
• Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $500.

Working notes:

(8)Calculate interest payable.

$\begin{array}{c}\text{Cash paid =}\text{Face value of bonds }\times \text{ Interest rate}\times \text{Time period}\\ \text{=}\frac{\text{\$100,000}}{\text{5}\text{years}}\times \text{10\%}\times \frac{3}{12}\\ =\$500\end{array}$

 (9)Calculate premium on bonds payable.

$\begin{array}{c}\begin{array}{l}\text{Premium on }\\ \text{bonds payable }\end{array})\text{=}\frac{\text{Total premium on bonds}}{\text{life of bonds}}\times \text{Time period}\times \frac{\text{Retirement of bonds}}{\text{Face value of bonds}}\\ \text{=}\frac{\$3,000}{120\text{months}}\times 3\text{months}\times \frac{\text{\$20,000}}{\$100,000}\\ =\$75\times 0.2\\ \text{=}\text{\$15}\end{array}$

Prepare journal entry to record retirement of bonds as on 1^st February 2018.

Date	Account titles and Explanation	Debit	Credit
February 1, 2018	Bonds payable	$20,000
	Premium on bonds payable (10)	$525
	Interest payable (8)	$500
	Cash (11)		$20,100
	Gain on retirement of bonds (balancing figure)		$925
	(To record retirement of bonds)

Table (6)

• Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $20,000.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $525.
• Interest payable is a current liability, and it is decreased. Therefore, debit interest payable account for $500.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $20,100.
• Gain on retirement of bonds is a component of stockholders’ equity, and it increases revenue accounts. Therefore, credit gain on retirement of bonds account for $925.

Working notes:

(10)Calculate premium on bonds payable.

$\begin{array}{c}\begin{array}{l}\text{Premium on }\\ \text{bonds payable }\end{array})\text{=}\left(\begin{array}{l}\frac{\text{Retirement of bonds}}{\text{Face value of bonds}}\times \\ \text{Retirement of bonds}\end{array}\right)-\left(\begin{array}{l}\frac{\text{Total premium on bonds}}{\text{life of bonds}}\\ \times \text{Time period}\end{array}\right)\\ \text{=}\left(\frac{\$20,000}{\$100,000}\times \$200,000\right)-\left(\frac{\$3,000}{120\text{months}}\times 15\text{months}\right)\\ =\$600-\$75\\ =\$525\end{array}$

(11)Calculate cash.

$\begin{array}{c}\text{Cash =}\text{Issue price of retirement of bonds}\text{+}\text{Interest payable}\\ \text{=}\left(\text{\$20,000}\times \text{0}\text{.98}\right)+\$500\\ =\$19,600+\$500\\ =\$20,100\end{array}$