Videos
Issue of bond at discount:
When the coupon rate or contract rate of a bond is lower than the market interest rate, the bond is being issued at discount. The selling price of the bond will be lower than the face value of the bond under issue of bond at discount.
Under straight line amortization method, a specific amount of discount is amortized each period till its maturity period. The period ending amortization amount is computed by dividing the total discount by the number of periods in maturity of the bonds payable.
To determine:
1. Preparation of
2. Compute the total bond interest expense to be recognized over the life of the bonds.
3. Prepare the first two years of an amortization table using straight-line method.
4. Prepare the journal entries to record the first two interest payments.
Answer to Problem 5BPSB
Solution:
1.
| Date | Accounts | Debit | Credit |
| 2015 | |||
| Jan. 1 | Cash | $198,494 | |
| Discount on Bonds Payable | $41,506 | ||
| Bonds Payable | $240,000 |
2. The total bond interest expense to be recognized over the bond’s life is $97,819.
3.
| Period Ending | Unamortized Discount | Carrying Value |
| 01/1/2015 | $41,506 | $198,494 |
| 06/30/2015 | $10,122 | $199,878 |
| 12/31/2015 | $38,738 | $201,262 |
| 06/30/2016 | $37,354 | $202,646 |
| 12/31/2016 | $35,970 | $204,030 |
4.
| Date | General Journal | Debit | Credit |
| 2015 | |||
| Jun. 30 | Interest Expense | $8,584 | |
| Cash | $7,200 | ||
| Discount on Bonds Payable | $1,384 | ||
| Dec. 31 | Interest Expense | $8,584 | |
| Cash | $7,200 | ||
| Discount on Bonds Payable | $1,384 |
Explanation of Solution
Explanation:
1.
| Computation of discount on bonds | |
| Par | $240,000 |
| Issue price of bonds payable | $198,494 |
| Discount on bonds payable | $41,506 |
2.
| Computation of total interest expense | |
| Amount to be repaid at maturity: | |
| Total Interest Payment | $216,000 |
| Par Value of Bonds | $240,000 |
| Total amount to be repaid | $456,000 |
| Less : Selling Price of the Bonds | $198,494 |
| Total Bond Interest Expense | $257,506 |
3.
4.
Conclusion:
The total interest expense over the bond’s life of Legacy is $257,506 and every semiannual period a discount of $1,384 is amortized.
Want to see more full solutions like this?
Chapter 14 Solutions
FUND.ACCT.PRIN -ONLINE ONLY >I<
- Question 2 Long term assets without any physical existence but, possessing a value are called A) Intangible assets B) Fixed assets C) Current assets D) Investmentsarrow_forwardResources owned by a company (such as cash, accounts receivable, vehicles) are reported on the balance sheet and are referred to asarrow_forwardWhen are liabilities recorded under the accrual basis of accounting? When incurred When paid At the end of the fiscal year When bank accounts are reconciledarrow_forward
- Which of the following must a certified public accountant (CPA) have in-depth knowledge of to pass the CPA licensing exam? (Check all that apply.) Accounting software packages Auditing Derivatives International banking lawsarrow_forwardCrane Company accumulates the following data concerning a mixed cost, using units produced as the activity level. Units Produced Total Cost March 9,970 $20,005 April 8,930 18,154 May 10,500 20,538 June 8,710 17,674 July 9,370 18,604 Compute the fixed costs using the high-low method. Fixed cost $arrow_forwardHank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $20,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 32 percent this year and will be 35 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Use Exhibit 3.1. a. What is the after-tax income if Hank sends his client the bill in December? b. What is the after-tax income if Hank sends his client the bill in January? c. Should Hank send his client the bill in December or January? multiple choice 1 December January d. What is the after-tax income if Hank expects his marginal tax rate to be 24 percent next year and sends his client the bill in January? (Round your answer to the nearest whole dollar amount.) e. Should Hank send his client the bill in December or January…arrow_forward
- Which of the following is true? Accounts receivable are found in the current asset section of a balance sheet. Accounts receivable increase by credits. Accounts receivable are generated when a customer makes payments. Accounts receivable become more valuable over time.arrow_forwardAssets are usually reported on the balance sheet at which amount? Cost Current Market Value Expected Selling Price.arrow_forwardManny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny’s marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 8 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) c. Based on requirements a and b, should Manny send his client the bill in December or January? multiple choice December Januaryarrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education