Chapter 14, Problem 1BP

1.

To determine

Prepare the journal entry to record issuance of bonds payable at discount on January 1, 2019.

Explanation of Solution

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

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.

Prepare journal entry for issuance of bonds payable on January 1, 2019.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2019	Cash		3,010,000
January 1	Discount on Bonds Payable		390,000 (1)
	Bonds Payable			3,400,000
	(To record issuance of bonds payable at discount)

Table (1)

Description:

• Cash is an asset and it is increased. So, debit it by $3,010,000.
• Discount on Bonds Payable is a contra liability account and it is decreased. So, debit it by $390,000.
• Bonds payable is a liability and it is increased. So, credit it by $3,400,000.

Working Note:

Calculate the amount of total bonds discount.

Par value of bonds = $3,400,000

Issue price of bonds = $3,010,000

$\begin{array}{c}\text{Total bonds discount = Par}\text{value of bonds}-\text{Cash received from issued of bonds}\\ =\$3,400,000-\$3,010,000\\ =\$390,000\end{array}$ (1)

2.

To determine

Compute for each semi-annual period;

1. (a) The cash payment
2. (b) The straight-line discount amortization
3. (c) The bond interest expense

Explanation of Solution

(a)

Calculate the amount of cash interest paid (semi-annually).

Par value of bonds = $3,400,000

Interest rate = 10%

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Par value}\times \text{Interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$3,400,000\times \frac{10}{100}\times \frac{1}{2}\\ =\$170,000\end{array}$ (2)

Therefore, the amount of cash interest paid (semi-annually) is $170,000.

(b)

Calculate amortization of bond discount per interest payment.

Total bonds discount = $390,000 (1)

Number of semiannual payments = 20 (10 years semiannual payments)

$\begin{array}{c}\text{Amortization of bond discount per interest payment = }\frac{\text{Total bonds discount}}{\text{Number}\text{of}\text{semiannual}}\\ =\frac{\$390,000}{20}\\ =\$19,500\end{array}$ (3)

Therefore, the amortization of bond discount per interest payment is $19,500.

(c)

Calculate the interest expense on the bond.

Cash interest = $170,000 (2)

Bond discount per interest payment = $19,500 (3)

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Semiannual}\text{discount}on\text{b}onds\text{p}ayable\\ =\$170,000+\$19,500\\ =\$189,500\end{array}$

Therefore, the amount of interest expense on the bond is $189,500.

3.

To determine

Calculate the total bond interest expense that will be recognized over the life of the bonds.

Explanation of Solution

Bond interest expense: Bond interest expense is the interest charged by the bondholders at a certain rate of interest.

Calculate the total bond interest expense.

Details	Amount ($)
Total interest payments for 10 years (20 Semiannual payments)	3,400,000 (4)
Add: Discounts	390,000 (1)
Total bond interest expense	$3,790,000

Table (2)

Working Note:

Calculate the total interest payments for 10 years (semi-annually).

$\begin{array}{c}\begin{array}{l}\text{Total interest payments for}\\ \text{10 years (semi-annually)}\end{array}]=\left(\text{Par value}\times \text{Interest rate}\times \frac{1}{2}\right)\times 20\\ =\left(\$3,400,000\times 10\%\times \frac{1}{2}\right)\times 20\\ =\$170,000\times 20\\ =\$3,400,000\end{array}$ (4)

Conclusion

Therefore the total interest payment for 10 years (semi-annually) is $3,790,000.

4.

To determine

Prepare an amortization table for the first two years of the bonds using straight-line method to amortize the discount.

Explanation of Solution

Amortization of bond: The process of allocation and reduction of the discount or premium on bonds to interest expense over the life of bonds is referred to as amortization of bonds.

Prepare an amortization table for the first two years of the bonds using straight-line method to amortize the discount.

Date	Discount Unamortized	Carrying Amount
01/01/2019	$390,000	$3,010,000
30/06/2019	$370,500	$3,029,500
31/12/2019	$351,000	$3,049,000
30/06/2020	$331,500	$3,068,500
31/12/2020	$312,000	$3,088,000

Table (3)

Note: The amortization of bond discount per interest payment is $19,500 (3) is added with the carrying amount.

5.

To determine

Prepare the journal entry to record semi-annual interest and amortization of discount on bonds.

Explanation of Solution

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

Prepare journal entry for payment of semi-annual interest and amortization of discount on bonds.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2019	Bond Interest Expense (5)		189,500
June 30	Discount on Bonds Payable  (3)			19,500
	Cash (2)			170,000
	(To record semi-annual payment of interest and amortization of discount on bonds)

Table (4)

To record semi-annual payment of interest and amortization of discount on bonds:

• Interest expense is an expense and it decreases the equity value. So, debit it by $189,500.
• Discount on Bonds Payable is a contra liability account and it is increased. So, credit it by $19,500.
• Cash is an asset and it is decreased. So, credit it by $170,000

Working notes:

Calculate the interest expense on the bond as on June 30, 2019.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$170,000+\$19,500\\ =\$189,500\end{array}$ (5)

Prepare journal entry for payment of semi-annual interest and amortization of discount on bonds.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2019	Bond Interest Expense (6)		189,500
December 31	Discount on Bonds Payable  (3)			19,500
	Cash (2)			170,000
	(To record semiannual payment of interest and amortization of discount on bonds)

Table (5)

To record semi-annual payment of interest and amortization of discount on bonds:

• Interest expense is an expense and it decreases the equity value. So, debit it by $189,500.
• Discount on Bonds Payable is a contra liability account and it is increased. So, credit it by $19,500.
• Cash is an asset and it is decreased. So, credit it by $170,000

Working notes:

Calculate the interest expense on the bond as on December 31, 2019.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$170,000+\$19,500\\ =\$189,500\end{array}$ (6)