Chapter 14, Problem 9E

1)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

To determine:

Amount received on issuance of bonds

Answer to Problem 9E

Solution:

Amount received on issuance of bonds is $684,250

Explanation of Solution

• When a company decides to issue bonds, it can do so at par, at a premium or at a discount. If the issue price equals the par value, the bonds are said to be issued at par.

• If the issue price is less than the par value, the bonds are said to be issued at a discount. If the issue price exceeds the par value, the bonds are said to be issued at a premium

• The company issued $700,000, 10% Bonds repayable 15 years for 97 ¾. This indicates that the issue price is less than the par value of $100 and hence the bonds are issued at a discount.

• Amount received on issuance of bond is calculated as a product of Par value of bonds and issue price

  $\begin{array}{l}\text{Amount received on issuance of bonds = Par value x Issue Price / 100}\\ \\ \text{Amount received on issuance of bonds = \$700,000 x 97}\text{.75 / 100}\\ \\ \text{Amount received on issuance of bonds = \$684,250}\end{array}$

Conclusion

Hence the Amount received on issuance of bonds is determined.

2)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

To determine:

Discount on issuance of bonds

Answer to Problem 9E

Solution:

Discount on issuance of bonds is $15,750

Explanation of Solution

• When a company decides to issue bonds, it can do so at par, at a premium or at a discount. If the issue price equals the par value, the bonds are said to be issued at par.

• If the issue price is less than the par value, the bonds are said to be issued at a discount. If the issue price exceeds the par value, the bonds are said to be issued at a premium

• The company issued $700,000, 10% Bonds repayable 15 years for 97 ¾. This indicates that the issue price is less than the par value of $100 and hence the bonds are issued at a discount.

• Discount on issuance of bond is calculated as the difference of Par value of the bonds and Amount received on Issuance of Bonds

  $\begin{array}{l}\text{Amount received on issuance of bonds = Par value x Issue Price / 100}\\ \\ \text{Amount received on issuance of bonds = \$700,000 x 97}\text{.75 / 100}\\ \\ \text{Amount received on issuance of bonds = \$684,250}\\ \\ \text{Discount on issue of Bonds = Par value of the bonds - Amount received on Issuance of Bonds}\\ \\ \text{Discount on issue of Bonds = \$ 700,000 - \$684,250 = \$ 15,750 }\end{array}$

Conclusion

Hence the Discount on issuance of bonds is determined.

3)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

To determine:

Amount of discount amortized on bonds till December 2020

Answer to Problem 9E

Solution:

Amount of discount amortized on bonds till December 2020 is $6,300

Explanation of Solution

• When a company decides to issue bonds, it can do so at par, at a premium or at a discount. If the issue price equals the par value, the bonds are said to be issued at par.

• If the issue price is less than the par value, the bonds are said to be issued at a discount. If the issue price exceeds the par value, the bonds are said to be issued at a premium

• The company issued $700,000, 10% Bonds repayable 15 years for 97 ¾. This indicates that the issue price is less than the par value of $100 and hence the bonds are issued at a discount.

• Under straight line method of amortization, the discount on issue of bonds is amortized in equal installments over the lifetime of the bonds.

• The discount on issue is $15,750 and the duration of the bonds is 15 years. Annual discount on issue to be amortized is calculated as follows:

  $\begin{array}{l}\text{Discount on issue of bonds amortized per annum = Discount on issue of bonds / Duration of bonds}\\ \\ \text{Discount on issue of bonds amortized per annum = \$15,750 / 15 = \$1,050 per annum}\\ \\ \text{Discount on issue of bonds amortized till December 2020 = Discount on issue of bonds amortized per annum x 6}\\ \\ \text{Discount on issue of bonds amortized till December 2020 = \$1,050 x 6 = \$ 6,300}\\ \end{array}$

Conclusion

Hence the Amount of discount amortized on bonds till December 2020 is calculated.

4)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

To determine:

Carrying amount of Bonds payable as on December 2020

Answer to Problem 9E

Solution:

Carrying amount of Bonds payable as on December 2020 is $690,550

Explanation of Solution

• When a company decides to issue bonds, it can do so at par, at a premium or at a discount. If the issue price equals the par value, the bonds are said to be issued at par.

• If the issue price is less than the par value, the bonds are said to be issued at a discount. If the issue price exceeds the par value, the bonds are said to be issued at a premium

• The company issued $700,000, 10% Bonds repayable 15 years for 97 ¾. This indicates that the issue price is less than the par value of $100 and hence the bonds are issued at a discount.

• Under straight line method of amortization, the discount on issue of bonds is amortized in equal installments over the lifetime of the bonds.

• Carrying amount of bonds is calculated as the difference of the par value of bonds and any unamortized discounts on issue as on the date of calculation.

  $\begin{array}{l}\text{Discount on issue of bonds amortized per annum = Discount on issue of bonds / Duration of bonds}\\ \\ \text{Discount on issue of bonds amortized per annum = \$15,750 / 15 = \$1,050 per annum}\\ \\ \text{Discount on issue of bonds amortized till December 2020 = Discount on issue of bonds amortized per annum x 6}\\ \\ \text{Discount on issue of bonds amortized till December 2020 = \$1,050 x 6 = \$ 6,300}\\ \\ \text{Amount of Discount Unamortized on December 2020 = Total discount on Issue of bonds }\\ \text{ - Discount on issue of bonds amortized till December 2020}\\ \\ \text{Amount of Discount Unamortized on December 2020=\$15,750-\$6,300=\$9,450}\\ \\ \text{Carrying value of Bonds on December 2020 = Par value - Amount of Discount Unamortized on December 2020}\\ \\ \text{Carrying value of Bonds on December 2020 =\$700,000-\$9,450=\$690,550}\\ \\ \text{20\% of Carrying value of Bonds on December 2020 = \$690,550 x 20\% = \$138,110}\end{array}$

Conclusion

Hence the carrying amount of the bonds as on December 2020 is calculated.

5)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

To determine:

Amount paid on repurchase of bonds

Answer to Problem 9E

Solution:

Amount paid on repurchase of bonds is $ 146,300

Explanation of Solution

• When a company decides to repurchase bonds, it can do so at par, at a premium or at a discount. If the repurchase price equals the par value, the bonds are said to be repurchased at par.

• If the repurchase price is less than the par value, the bonds are said to be repurchased at a discount. If the repurchase price exceeds the par value, the bonds are said to be repurchased at a premium

• The company repurchased 20% of the $700,000, 10% Bonds repayable 15 years for 104.5. This indicates that the repurchase price is greater than the par value of $100 and hence the bonds are repurchased at a premium.

• Amount paid on repurchase of bond is calculated as a product of Par Value of bonds and repurchase price

  $\begin{array}{l}\text{Par value of 20\% of the bonds = Total par value x 20\% = \$700,000 x 20\% = \$140,000}\\ \\ \text{Amount paid on repurchase of bonds = Par Value of 20\% Bonds x Issue Price / 100}\\ \\ \text{Amount paid on repurchase of 20\% bonds= \$140,000 x 104}\text{.5 / 100 = \$ 146,300}\text{.}\\ \end{array}$

Conclusion

Hence the Amount paid on repurchase of bonds is calculated

6)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

To determine:

Gain or loss on repurchase of bonds

Answer to Problem 9E

Solution:

Loss on repurchase of the bonds is $ 8,190

Explanation of Solution

• When a company decides to repurchase bonds, it can do so at par, at a premium or at a discount. If the repurchase price equals the par value, the bonds are said to be repurchased at par.

• If the repurchase price is less than the par value, the bonds are said to be repurchased at a discount. If the repurchase price exceeds the par value, the bonds are said to be repurchased at a premium

• The company repurchased 20% of the $700,000, 10% Bonds repayable 15 years for 104.5. This indicates that the repurchase price is greater than the par value of $100 and hence the bonds are repurchased at a premium.

• Amount paid on repurchase of bond is calculated as a product of Carrying amount of bonds and repurchase price

• If the repurchase price is less than the carrying amount, the bonds are said to be repurchased at a profit and if the repurchase price exceeds the carrying, the bonds are said to be repurchased at a loss.

  $\begin{array}{l}\text{Par value of 20\% of the bonds = Total par value x 20\% = \$700,000 x 20\% = \$140,000}\\ \\ \text{Amount paid on repurchase of bonds = Par Value of 20\% Bonds x Issue Price / 100}\\ \\ \text{Amount paid on repurchase of 20\% bonds= \$140,000 x 104}\text{.5 / 100 = \$ 146,300}\text{.}\\ \\ \text{Gain or (Loss) on repurchase = Carrying Value - Repurchase Value}\\ \\ \text{Loss on repurchase = }\$138,110-\$146,300=(\$8,190)\end{array}$

Conclusion

Hence the loss on repurchase of bonds has been calculated.

7)

To determine

Introduction:

Bonds

• Bonds are long term negotiable instruments of debt issued by corporate entities to secure funds and fund either long term capital expenditure or similar long term investment opportunities.

• Bonds are accompanied by periodic interest payments. They are issued at par, at premium or at a discount.

• Bonds when issued at a discount represent a loss to the company since the repayment value is more than the value of the Bonds borrowed.

Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited will be credited by credited to reflect the effect of business transactions and events.

To Prepare:

Journal entry to record repurchase of bonds

Answer to Problem 9E

Solution:

Date	Particulars	Debit	Credit
January 1, 2021	Bonds Payable	$140,000.00
	Loss on retirement	$8,190
	Cash		$146,300
	Discount on Issue of Bonds Payable		$1,890
	(Being 20% of the bonds retired through repurchase in the open market for 104.5)

Explanation of Solution

• When a company decides to repurchase bonds, it can do so at par, at a premium or at a discount. If the repurchase price equals the par value, the bonds are said to be repurchased at par.

• If the repurchase price is less than the par value, the bonds are said to be repurchased at a discount. If the repurchase price exceeds the par value, the bonds are said to be repurchased at a premium

• The company repurchased 20% of the $700,000, 10% Bonds repayable 15 years for 104.5. This indicates that the repurchase price is greater than the par value of $100 and hence the bonds are repurchased at a premium.

• Amount paid on repurchase of bond is calculated as a product of Carrying amount of bonds and repurchase price

• If the repurchase price is less than the carrying amount, the bonds are said to be repurchased at a profit and if the repurchase price exceeds the carrying, the bonds are said to be repurchased at a loss.

  $\begin{array}{l}\text{Par value of 20\% of the bonds = Total par value x 20\% = \$700,000 x 20\% = \$140,000}\\ \\ \text{Amount paid on repurchase of bonds = Par Value of 20\% Bonds x Issue Price / 100}\\ \\ \text{Amount paid on repurchase of 20\% bonds= \$140,000 x 104}\text{.5 / 100 = \$ 146,300}\text{.}\\ \\ \text{Gain or (Loss) on repurchase = Carrying Value - Repurchase Value}\\ \\ \text{Loss on repurchase = }\$138,110-\$146,300=(\$8,190)\end{array}$

• Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

• Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.

• On January 1, 2021 Bonds Payable will be debited by $140,000.00, Loss on Repurchase will be debited by $8,190, Cash will be credited by $146,300 and Discount on Issue of Bonds Payable will be credited by $1,890 since 20% of the bonds retired through repurchase in the open market for 104.5.

• The par value of the bonds is $700,000 and 20% of the par value is $140,000. Discount on Issue of Bonds Payable is credited by $1,890 since it is 20% of the remaining discount yet to be amortized ($9,450 x 20%)

• Cash is an asset and must be credited to indicate decrease in balances. Bonds Payable is a liability and must be debited to indicate decrease in balances.

Conclusion

Hence the transaction for repurchase has been journalized.