Chapter 14, Problem 5E

a.

To determine

Prepare the journal entry to record issuance of bonds payable at discount on December 31, 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 December 31, 2015.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2015		Cash				188,000
December 31		Discount on Bonds Payable				12,000
			Bonds Payable				200,000
				(To record issuance of bonds payable at discount)

Table (1)

Description:

• Cash is an asset and it is increased. So, debit it by $188,000.
• Discount on Bonds Payable is an adjunct liability account and it is decreased. So, debit it by $12,000.
• Bonds payable is a liability and it is increased. So, credit it by $200,000.

b.

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 ($)	Credit ($)
2016		Bond Interest Expense (3)				8,000
June	30		Discount on Bonds Payable  (1)				3,000
			Cash (2)				5,000
				(To record semiannual payment of interest and amortization of discount on bonds)

Table (2)

Working notes:

Calculate discount on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 31/12/2015}\\ -\text{Unamortized discount on 30/06/2016}\end{array}\right)\\ =\$12,000-\$9,000\\ =\$3,000\end{array}$ (1)

Calculate the amount of cash interest as on June 30, 2016.

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (2)

Calculate the interest expense on the bond as on June 30, 2016.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (3)

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

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

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2016		Bond Interest Expense (6)				8,000
December	31		Discount on Bonds Payable  (4)				3,000
			Cash (5)				5,000
				(To record semiannual payment of interest and amortization of discount on bonds)

Table (3)

Working notes:

Calculate discount on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 30/06/2016}\\ -\text{Unamortized discount on 31/12/2016}\end{array}\right)\\ =\$9,000-\$6,000\\ =\$3,000\end{array}$ (4)

Calculate the amount of cash interest as on December 31, 2016.

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (5)

Calculate the interest expense on the bond as on December 31, 2016.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (6)

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

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

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2017		Bond Interest Expense (9)				8,000
June	30		Discount on Bonds Payable  (7)				3,000
			Cash (8)				5,000
				(To record semiannual payment of interest and amortization of discount on bonds)

Table (4)

Working notes:

Calculate discount on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 31/12/2016}\\ -\text{Unamortized discount on 30/06/2017}\end{array}\right)\\ =\$6,000-\$3,000\\ =\$3,000\end{array}$ (7)

Calculate the amount of cash interest as on June 30, 2017.

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (8)

Calculate the interest expense on the bond as on June 30, 2017.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (9)

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

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

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2017		Bond Interest Expense (12)				8,000
December	31		Discount on Bonds Payable  (10)				3,000
			Cash (11)				5,000
				(To record semiannual payment of interest and amortization of discount on bonds)

Table (5)

Working notes:

Calculate discount on bonds payable semiannually.

$\begin{array}{c}\begin{array}{l}\text{Discount on bonds payable}\\ \text{semiannually}\end{array}\}=\left(\begin{array}{l}\text{Unamortized discount on 30/06/2017}\\ -\text{Unamortized discount on 31/12/2017}\end{array}\right)\\ =\$3,000-\$0\\ =\$3,000\end{array}$ (10)

Calculate the amount of cash interest as on June 30, 2016.

$\begin{array}{c}\text{Cash interest}=\left(\begin{array}{l}\text{Face value}\times \text{Face interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$200,000\times \frac{5}{100}\times \frac{6}{12}\\ =\$5,000\end{array}$ (11)

Calculate the interest expense on the bond as on June 30, 2016.

$\begin{array}{c}\text{Interest}\text{Expense}=\text{Cash}\text{Interest +Discount}onBondsPayable\\ =\$5,000+\$3,000\\ =\$8,000\end{array}$ (12)

• Interest expense is an expense and it decreases the equity value. So, debit it by $8,000.
• Discount on Bonds Payable is an adjunct liability account and it is increased. So, credit it by $3,000.
• Cash is an asset and it is decreased. So, credit it by $5,000

c.

To determine

Prepare the journal entry to record the payment of bond payable at maturity.

Explanation of Solution

Prepare journal entry for payment of bond payable at maturity.

Date		Accounts and Explanation			Post Ref	Debit ($)	Credit ($)
2017		Bonds Payable				200,000
December	31		Cash				200,000
				(To record the payment of bond payable at maturity)

Table (6)

• Bonds payable is a liability and it is decreased. So, debit it by $200,000.
• Cash is an asset and it is decreased. So, credit it by $200,000.