Chapter 14, Problem 2BP

1.

To determine

Prepare the journal entry to record issuance of bonds payable at discount on January 1, 2015.

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, 2015.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2015		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)

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)

Description:

• Cash is an asset and it is increased. So, debit it by $3,010,000.
• Discount on Bonds Payable is an adjunct 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.

2.

To determine

Compute for each semiannual 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 (semiannually).

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 (semiannually) 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

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

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

Date	Discount Unamortized ($)	Carrying Amount ($)
01/01/2015	390,000	3,010,000
30/06/2015	370,500	3,029,500
31/12/2015	351,000	3,049,000
30/06/2016	331,500	3,068,500
31/12/2016	312,000	3,088,000

Table (3)

Note: The amortization of bond discount per interest payment is $19,500 (3).

5.

To determine

Prepare the journal entry to record semiannual interest and amortization of discount on bonds.

Explanation of Solution

Prepare journal entry for payment of semiannual interest and amortization of discount on bonds.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2015		Bond Interest Expense (5)				189,500
June	30		Discount on Bonds Payable  (3)				19,500
			Cash (2)				170,000
				(To record semiannual payment of interest and amortization of discount on bonds)

Table (4)

Working notes:

Calculate the interest expense on the bond as on June 30, 2015.

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

• Interest expense is an expense and it decreases the equity value. So, debit it by $189,500.
• Discount on Bonds Payable is an adjunct 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

Prepare journal entry for payment of semiannual interest and amortization of discount on bonds.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2015		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)

Working notes:

Calculate the interest expense on the bond as on December 31, 2015.

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

• Interest expense is an expense and it decreases the equity value. So, debit it by $189,500.
• Discount on Bonds Payable is an adjunct 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