Chapter 14, Problem 1E

1.

To determine

Calculate the interest paid to bondholders every six months.

Explanation of Solution

Calculate the semi-annual interest.

$\begin{array}{c}\begin{array}{l}\text{Semi-annual}\\ \text{interest}\text{payment}\end{array})\text{=Par}\text{value}\text{of}\text{bond×Interest}\text{rate×}\frac{\text{6}}{\text{12}}\\ \text{=}\text{\$3,400,000×9\%×}\frac{\text{6}}{\text{12}}\\ \text{=\$153,000}\end{array}$

Therefore the interest paid to bondholders is $153,000.

Note: Time period = 6 months.

2.

To determine

Prepare journal entries.

Explanation of Solution

(a)

Prepare journal entries for the issuance of bonds on January 1, 2015.

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.

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Date		Accounts and Explanations	Debit ($)	Credit ($)
2015
January	1	Cash	3,400,000
		Bonds Payable		3,400,000
		(To record sale of bonds on par)

Table (1)

• Cash is an asset account. The amount has increased because bonds are issued at a premium; therefore, debit Cash account with $3,400,000.
• Bonds Payable is a liability account and it is increased therefore; credit Bonds Payable account with $3,400,000.

(b)

Prepare journal entries to record interest payment on June 30, 2017.

Date		Accounts title and Explanations	Debit ($)	Credit ($)
2015
June	30	Bond Interest Expense (1)	153,000
		Cash		153,000
		(To record the payment of  semi-annual interest)

Table (2)

• Bond Interest Expense is a component of stockholders equity. There is an increase in the expense account which decreased the stockholders’ equity. Therefore, debit interest expense account by $153,000.
• Cash is an asset account and it is decreased. Therefore credit cash account by $153,000

Working Notes:

Calculate amount of interest payable.

$\begin{array}{c}\text{Interest payable }=\text{Face value of bonds}\times \text{Interest rate}\times \text{Time period}\\ =\text{\$3,400,000 ×}\frac{9}{\text{100}}\times \frac{6}{12}\\ =\text{\$153,000}\end{array}$ (1)

Note: Time period = 6 months (January, 2015 to June 30, 2015)

(C)

Prepare journal entries to record interest payment on December 31, 2017.

Date		Accounts title and Explanations	Debit ($)	Credit ($)
2015
June	30	Bond Interest Expense (2)	153,000
		Cash		153,000
		(To record the payment of  semi-annual interest)

Table (3)

• Bond Interest Expense is a component of stockholders equity. There is an increase in the expense account which decreased the stockholders’ equity. Therefore, debit interest expense account by $153,000.
• Cash is an asset account and it is decreased. Therefore credit cash account by $153,000

Working Notes:

Calculate amount of interest payable.

$\begin{array}{c}\text{Interest payable }=\text{Face value of bonds}\times \text{Interest rate}\times \text{Time period}\\ =\text{\$3,400,000 ×}\frac{9}{\text{100}}\times \frac{6}{12}\\ =\text{\$153,000}\end{array}$ (2)

Note: Time period = 6 months (June 30, 2015 to December 31, 2015)

3.

To determine

Prepare journal entries for issuance of bonds.

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.

Discount on bonds payable:

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

Premium on bonds payable:

Premium on bonds payable occurs when the bonds are issued at a higher price than the face value of bond.

(a)

Prepare journal entries for issuance of bonds at $98.

Date	Account title and explanation	Debit $	Credit $
2015	Cash (3)	3,332,000
January 1	Discount on Bonds Payable(4)	68,000
	Bonds Payable		3,400,000
	(To record issued bonds payable at a discount)

Table (4)

• Cash is an asset and it is increased. So, debit it by $3,332,000.
• Discount on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $68,000.
• Bonds payable is a liability and it is increased. So, credit it by $3,400,000.

Working note:

Calculate the cash received on issuance of bond in discount:

$\begin{array}{c}\text{Cash}\text{received}\text{=}\text{Par}\text{value}\text{of}\text{bond}\text{×}\text{Sale}\text{price}\text{of}\text{bond}\\ \text{=\$3,400,000}\text{×}\text{0}\text{.98}\\ \text{=\$3,332,000}\end{array}$ (3)

Calculate the discount on bonds payable:

$\begin{array}{c}\text{Discount on bonds payable}=\text{Face value}\text{of bonds}–\text{Cash}\text{received}\\ =\$3,400,000–\$3,332,000\\ =\$68,000\end{array}$ (4)

(b)

Prepare journal entries for issuance of bonds at $102.

Date		Accounts and Explanations	Debit ($)	Credit ($)
2015
January	1	Cash  (5)	3,468,000
		Premium on Bonds Payable ( (6)		68,000
		Bonds Payable		3,400,000
		(To record sale of bonds on premium)

Table (5)

• Cash is an asset account. The amount has increased because bonds are issued at a premium; therefore, debit Cash account with $3,468,000.
• Premium on Bonds Payable is an adjunct account to Bonds Payable account and it has a normal credit balance; therefore, credit Premium on Bonds Payable account with $68,000.
• Bonds Payable is a liability account and it is increased therefore; credit Bonds Payable account with 3,400,000.

Working note:

Calculate the cash received on issuance of bond on premium:

$\begin{array}{c}\text{Cash}\text{received}\text{=}\text{Par}\text{value}\text{of}\text{bond}\text{×}\text{Sale}\text{price}\text{of}\text{bond}\\ \text{=\$3,400,000}\text{×}1.02\\ \text{=\$3,468,000}\end{array}$ (5)

Calculate the premium on bonds payable:

$\begin{array}{c}\text{Premium on bonds payable}=\text{Cash}\text{received}-\text{Face value}\text{of bonds}\\ =\$3,468,000–\$3,400,000\\ =\$68,000\end{array}$ (6)