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Business Accounting ACCOUNTING PRINCIPLES

(a) Bond Issuance: The Company issues the bonds when it needed of long-term debt and for this purpose it calls the public to buy the bond, this whole process is known as bond issuance. Bond Redemption: Bond redemption refers the payment of bonds to its bondholder is made by the issuer. Journalizing: It is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the amounts are posted to the relevant ledger accounts. Accounting rules for journal entries: To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains. To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains. To prepare: The journal entries. Explanation: (1) Journal entry in the books of Company J for the issuance of bonds Date Account Title and Explanation Post Ref. Amount ($) Amount ($) January 1 Cash 2,147,202 Bonds Payable 2,000,000 Premium on Bonds Payable 147,202 (To record the issuance of bond at premium.) Cash account is an asset account of the company and it increases the balance of assets. Hence, the cash account will be debited. Bonds payable is the liability of the company and it increases the balance of liabilities account. Hence, the bonds payable account will be credited. Premium on bonds payable is the liability for the company. Hence, premium on bonds payable account will be credited. Working note: Compute the premium on bond payable Given, Face value of the bond is $2,000,000. Bonds are issued at $2,147,202. Formula to calculate the discount on bonds, Premium on Bonds Payable = Total Issued Price − Face Value Substitute $2,147,202 for issued price and $2,000,000 for total issues price. Premium on Bonds Payable = $ 2 , 147 , 202 − $ 2 , 000 , 000 = $ 147 , 202 (1) Hence, premium on bonds payable is $147,202. Hence, cash account is debited and bonds payable and premium on bonds payable accounts are credited. (2) Journal entry in the books of Company J for the accrual of interest and amortization of discount Date Account Title and Explanation Post Ref. Amount ($) Amount ($) December 31 Interest Expense 128,832 Premium on Bonds Payable 11,168 Interest Payable 140,000 (To record the accrual interest and amortization of premium.) Interest expense is an expense for the company and it increases the interest account. Hence, interest expense account will be debited. Premium on bonds payable account is liability and it is credited at the time of issuance. Hence, to reverse the entry at the time of adjustment, the premium on bonds payable account will be debited. Interest payable is the liability of the company and it increases the liability account. Hence, interest payable account is credited. Working Note: Compute the interest payables Given, The face value of the bond is $2,000,000. The interest rate is 7%. The time period is 1 year. Formula to calculate the interest, Interest Payable = F V × r × t 100 Where, F V is the face value. r is the interest rate. t is the time period. Substitute $2,000,000 for F V , 7 for r and 1 for t . Interest Payable = $ 2 , 000 , 000 × 7 × 1 100 = $ 14 , 000 , 000 100 = $ 140 , 000 (2) Hence, the interest payable is $140,000. Compute the interest expense Given, The issued price is $2,147,202. The interest rate is 6%. The time period is 1 year. Formula to calculate the interest expense, Interest Expense = Issued Price × r × t 100 Where, r is the interest rate. t is the time period. Substitute $2,147,202 for issued price, 6 for r and 1 for t . Interest Expense = $ 2 , 147 , 202 × 6 × 1 100 = $ 12 , 883 , 212 100 = $ 128 , 832 (3) Hence, the interest expense is $128,832. Compute the premium on bonds payable The interest payable is $140,000. (Calculated in equation 2) The interest expense is $128,832. (Calculated in equation 3) Formula to calculate the premium on bonds payable, Premium on Bonds Payable = Interest Payable − Interest Expense Substitute $140,000 for interest payable and $128,832 for interest expense. Premium on Bonds Payable = $ 140 , 000 − $ 128 , 832 = $ 11 , 168 (4) Hence, the premium on bonds payable is $11,168. Hence, interest expense account and premium on bonds payable accounts are debited and interest payable account is credited. (3) Journal entry in the books of Company J to record the payment of interest on January 1, 2018 Date Account Title and Explanation Post Ref. Amount ($) Amount ($) January 1 Interest Payable 140,000 Cash 140,000 (To record the payment of interest is made.) Interest payable is the liability account and here the payment of the liability is made so the liability account will decrease. Hence, interest payable account will be debited. Cash is used to make the payments. Cash is an asset account and to make payment the cash account decreases. Hence, the cash account will be credited. Hence, interest payable account is debited and cash account is credited. (4) Journal entry in the books of Company J for the accrual of interest and amortization of premium Date Account Title and Explanation Post Ref. Amount ($) Amount ($) December 31 Interest Expense 128,162 Premium on Bonds Payable 11,838 Interest Payable 140,000 (To record the accrual interest and amortization of discount.) Interest expense is an expense for the company and it increases the expense account. Hence, interest expense account will be debited. Premium on bonds payable account is liability and it is credited at the time of issuance. Hence, to reverse the entry at the time of adjustment, the premium on bonds payable account will be debited. Interest payable is the liability of the company and it increases the liability account. Hence, interest payable account is credited. Working Note: Compute premium on bonds payable In order to calculate the premium on bonds payable, interest payable and interest expense needs to calculate. Interest payable is $140,000. (Calculated in equation 1) Compute interest expense Interest will be calculated on the carrying value of the bond. Bond Carrying value is $2,136,034 ( $ 2 , 147 , 202 − $ 11 , 168 ) . Interest rate is 6%. The time period is 1 year. Formula to calculate the interest expense, Interest Expense = Bond Carrying Value × r × t 100 Where, r is the interest rate. t is the time period. Substitute $2,136,034 for bond carrying value, 6 for r and 1 for t . Interest Expense = $ 2 , 136 , 034 × 6 × 1 100 = $ 12 , 816 , 204 100 = $ 128 , 162 (5) Hence, the interest expense is $128,162. Compute the premium on bonds payable The interest payable is $140,000. (Calculated in equation 1) The interest expense is $128,162. (Calculated in equation 5) Formula to calculate the premium on bonds payable, Premium on Bonds Payable = Interest Payable − Interest Expense Substitute $140,000 for interest payable and $128,162 for interest expense. Premium on Bonds Payable = $ 140 , 000 − $ 128 , 162 = $ 11 , 838 (6) Hence, the premium on bonds payable is $11,838. Hence, interest expense account and premium on bonds payable accounts are debited and interest payable account is credited. (b) To prepare: The balance sheet . Explanation: Balance sheet presentation as on December 31, 2018 Liabilities Amount($) Amount($) Long-term Liabilities: Bonds payable, due on 2027 2,000,000 Add: Premium on Bonds Payable 124,196 2,124,196 Bonds payable is the long term liability. Premium on bonds payable increases the liability for the company. Hence, premium on bonds payable will be added to the bonds payable account. Working Note: Compute the premium on bonds payable Total premium on bonds payable is $147,202. (Calculated in equation 1) Premium amortized in the first year is $11,168. (Calculated in equation 4) Premium amortized in the second year is $11,838. (Calculated in equation 6) Formula to calculate the premium on bonds payable Premium on Bonds Payable = ( Total Premium − Premium Amortized in First Year − Premium Amortized in Second Year ) Substitute $147,202 for total premium, $11,168 for premium amortized in first year and $11,838 for premium amortized in second year. Premium on Bonds Payable = $ 147 , 202 − $ 11 , 168 − $ 11 , 838 = $ 124 , 196 Hence, the premium on bonds payable is $124,196. Conclusion: Hence, bonds payable can be shown in the balance sheet under long-term liabilities. (c) (1) To determine: The interest expense for the year 2018. Answer: The interest amount expense amount for year 2018 is $128,162. (Calculated in equation 5) Conclusion: Hence, the interest expense amount for year 2018 is $128,162. (2) To determine: The comparison between the interest expenses calculated from the straight line method and effective interest method. Explanation: Compute the premium on bonds payable from the straight-line method Total premium on bonds payable is $147,202. The maturity of bond is 10 years. Formula to calculate the amortization premium, Amortized Premium = Total Premium Maturity period Substitute $147,202 for total premium and 10 for maturity period. Amortized Premium = $ 147 , 202 10 = 14 , 720 (7) The amortized premium is $14,720. Compute the interest expense Interest payable is $140,000. (Calculated in equation 1) Amortized premium is $14,720. (Calculated in equation 7) Formula to calculate the interest expense Interest Expense = Interest Payable − Amortized Premium Substitute $140,000 for interest payable and $14,720 for amortized premium. Interest Expense = $ 140 , 000 − $ 14 , 720 = $ 125 , 280 Hence, interest expense is $125,280. Compute the interest expense form effective interest rate method Given, The issued price is $2,147,202. The interest rate is 6%. The time period is 1 year. Formula to calculate the interest expense, Interest Expense = Issued Price × r × t 100 Where, r is the interest rate. t is the time period. Substitute $2,147,202 for issued price, 6 for r and 1 for t . Interest Expense = $ 2 , 147 , 202 × 6 × 1 100 = $ 12 , 883 , 212 100 = $ 128 , 832 Hence, the interest expense is $128,832. The interest expense from the effective interest rate method is $128,832 and from the straight-line method is $125,280. The interest expense from the effective interest rate method is greater than the straight-line method. Conclusion: The interest expense from the effective method, $128,832 is greater than the interest expense from straight-line method, $125,280.

(a) Bond Issuance: The Company issues the bonds when it needed of long-term debt and for this purpose it calls the public to buy the bond, this whole process is known as bond issuance. Bond Redemption: Bond redemption refers the payment of bonds to its bondholder is made by the issuer. Journalizing: It is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the amounts are posted to the relevant ledger accounts. Accounting rules for journal entries: To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains. To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains. To prepare: The journal entries. Explanation: (1) Journal entry in the books of Company J for the issuance of bonds Date Account Title and Explanation Post Ref. Amount ($) Amount ($) January 1 Cash 2,147,202 Bonds Payable 2,000,000 Premium on Bonds Payable 147,202 (To record the issuance of bond at premium.) Cash account is an asset account of the company and it increases the balance of assets. Hence, the cash account will be debited. Bonds payable is the liability of the company and it increases the balance of liabilities account. Hence, the bonds payable account will be credited. Premium on bonds payable is the liability for the company. Hence, premium on bonds payable account will be credited. Working note: Compute the premium on bond payable Given, Face value of the bond is $2,000,000. Bonds are issued at $2,147,202. Formula to calculate the discount on bonds, Premium on Bonds Payable = Total Issued Price − Face Value Substitute $2,147,202 for issued price and $2,000,000 for total issues price. Premium on Bonds Payable = $ 2 , 147 , 202 − $ 2 , 000 , 000 = $ 147 , 202 (1) Hence, premium on bonds payable is $147,202. Hence, cash account is debited and bonds payable and premium on bonds payable accounts are credited. (2) Journal entry in the books of Company J for the accrual of interest and amortization of discount Date Account Title and Explanation Post Ref. Amount ($) Amount ($) December 31 Interest Expense 128,832 Premium on Bonds Payable 11,168 Interest Payable 140,000 (To record the accrual interest and amortization of premium.) Interest expense is an expense for the company and it increases the interest account. Hence, interest expense account will be debited. Premium on bonds payable account is liability and it is credited at the time of issuance. Hence, to reverse the entry at the time of adjustment, the premium on bonds payable account will be debited. Interest payable is the liability of the company and it increases the liability account. Hence, interest payable account is credited. Working Note: Compute the interest payables Given, The face value of the bond is $2,000,000. The interest rate is 7%. The time period is 1 year. Formula to calculate the interest, Interest Payable = F V × r × t 100 Where, F V is the face value. r is the interest rate. t is the time period. Substitute $2,000,000 for F V , 7 for r and 1 for t . Interest Payable = $ 2 , 000 , 000 × 7 × 1 100 = $ 14 , 000 , 000 100 = $ 140 , 000 (2) Hence, the interest payable is $140,000. Compute the interest expense Given, The issued price is $2,147,202. The interest rate is 6%. The time period is 1 year. Formula to calculate the interest expense, Interest Expense = Issued Price × r × t 100 Where, r is the interest rate. t is the time period. Substitute $2,147,202 for issued price, 6 for r and 1 for t . Interest Expense = $ 2 , 147 , 202 × 6 × 1 100 = $ 12 , 883 , 212 100 = $ 128 , 832 (3) Hence, the interest expense is $128,832. Compute the premium on bonds payable The interest payable is $140,000. (Calculated in equation 2) The interest expense is $128,832. (Calculated in equation 3) Formula to calculate the premium on bonds payable, Premium on Bonds Payable = Interest Payable − Interest Expense Substitute $140,000 for interest payable and $128,832 for interest expense. Premium on Bonds Payable = $ 140 , 000 − $ 128 , 832 = $ 11 , 168 (4) Hence, the premium on bonds payable is $11,168. Hence, interest expense account and premium on bonds payable accounts are debited and interest payable account is credited. (3) Journal entry in the books of Company J to record the payment of interest on January 1, 2018 Date Account Title and Explanation Post Ref. Amount ($) Amount ($) January 1 Interest Payable 140,000 Cash 140,000 (To record the payment of interest is made.) Interest payable is the liability account and here the payment of the liability is made so the liability account will decrease. Hence, interest payable account will be debited. Cash is used to make the payments. Cash is an asset account and to make payment the cash account decreases. Hence, the cash account will be credited. Hence, interest payable account is debited and cash account is credited. (4) Journal entry in the books of Company J for the accrual of interest and amortization of premium Date Account Title and Explanation Post Ref. Amount ($) Amount ($) December 31 Interest Expense 128,162 Premium on Bonds Payable 11,838 Interest Payable 140,000 (To record the accrual interest and amortization of discount.) Interest expense is an expense for the company and it increases the expense account. Hence, interest expense account will be debited. Premium on bonds payable account is liability and it is credited at the time of issuance. Hence, to reverse the entry at the time of adjustment, the premium on bonds payable account will be debited. Interest payable is the liability of the company and it increases the liability account. Hence, interest payable account is credited. Working Note: Compute premium on bonds payable In order to calculate the premium on bonds payable, interest payable and interest expense needs to calculate. Interest payable is $140,000. (Calculated in equation 1) Compute interest expense Interest will be calculated on the carrying value of the bond. Bond Carrying value is $2,136,034 ( $ 2 , 147 , 202 − $ 11 , 168 ) . Interest rate is 6%. The time period is 1 year. Formula to calculate the interest expense, Interest Expense = Bond Carrying Value × r × t 100 Where, r is the interest rate. t is the time period. Substitute $2,136,034 for bond carrying value, 6 for r and 1 for t . Interest Expense = $ 2 , 136 , 034 × 6 × 1 100 = $ 12 , 816 , 204 100 = $ 128 , 162 (5) Hence, the interest expense is $128,162. Compute the premium on bonds payable The interest payable is $140,000. (Calculated in equation 1) The interest expense is $128,162. (Calculated in equation 5) Formula to calculate the premium on bonds payable, Premium on Bonds Payable = Interest Payable − Interest Expense Substitute $140,000 for interest payable and $128,162 for interest expense. Premium on Bonds Payable = $ 140 , 000 − $ 128 , 162 = $ 11 , 838 (6) Hence, the premium on bonds payable is $11,838. Hence, interest expense account and premium on bonds payable accounts are debited and interest payable account is credited. (b) To prepare: The balance sheet . Explanation: Balance sheet presentation as on December 31, 2018 Liabilities Amount($) Amount($) Long-term Liabilities: Bonds payable, due on 2027 2,000,000 Add: Premium on Bonds Payable 124,196 2,124,196 Bonds payable is the long term liability. Premium on bonds payable increases the liability for the company. Hence, premium on bonds payable will be added to the bonds payable account. Working Note: Compute the premium on bonds payable Total premium on bonds payable is $147,202. (Calculated in equation 1) Premium amortized in the first year is $11,168. (Calculated in equation 4) Premium amortized in the second year is $11,838. (Calculated in equation 6) Formula to calculate the premium on bonds payable Premium on Bonds Payable = ( Total Premium − Premium Amortized in First Year − Premium Amortized in Second Year ) Substitute $147,202 for total premium, $11,168 for premium amortized in first year and $11,838 for premium amortized in second year. Premium on Bonds Payable = $ 147 , 202 − $ 11 , 168 − $ 11 , 838 = $ 124 , 196 Hence, the premium on bonds payable is $124,196. Conclusion: Hence, bonds payable can be shown in the balance sheet under long-term liabilities. (c) (1) To determine: The interest expense for the year 2018. Answer: The interest amount expense amount for year 2018 is $128,162. (Calculated in equation 5) Conclusion: Hence, the interest expense amount for year 2018 is $128,162. (2) To determine: The comparison between the interest expenses calculated from the straight line method and effective interest method. Explanation: Compute the premium on bonds payable from the straight-line method Total premium on bonds payable is $147,202. The maturity of bond is 10 years. Formula to calculate the amortization premium, Amortized Premium = Total Premium Maturity period Substitute $147,202 for total premium and 10 for maturity period. Amortized Premium = $ 147 , 202 10 = 14 , 720 (7) The amortized premium is $14,720. Compute the interest expense Interest payable is $140,000. (Calculated in equation 1) Amortized premium is $14,720. (Calculated in equation 7) Formula to calculate the interest expense Interest Expense = Interest Payable − Amortized Premium Substitute $140,000 for interest payable and $14,720 for amortized premium. Interest Expense = $ 140 , 000 − $ 14 , 720 = $ 125 , 280 Hence, interest expense is $125,280. Compute the interest expense form effective interest rate method Given, The issued price is $2,147,202. The interest rate is 6%. The time period is 1 year. Formula to calculate the interest expense, Interest Expense = Issued Price × r × t 100 Where, r is the interest rate. t is the time period. Substitute $2,147,202 for issued price, 6 for r and 1 for t . Interest Expense = $ 2 , 147 , 202 × 6 × 1 100 = $ 12 , 883 , 212 100 = $ 128 , 832 Hence, the interest expense is $128,832. The interest expense from the effective interest rate method is $128,832 and from the straight-line method is $125,280. The interest expense from the effective interest rate method is greater than the straight-line method. Conclusion: The interest expense from the effective method, $128,832 is greater than the interest expense from straight-line method, $125,280.

ACCOUNTING PRINCIPLES

ACCOUNTING PRINCIPLES

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Author: Weygandt

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ACCOUNTING PRINCIPLES

Ch. 15 - Prob. 1Q Ch. 15 - 2. Contrast the following types of bonds: (a)...Ch. 15 - Prob. 3Q Ch. 15 - Prob. 4Q Ch. 15 - Prob. 5Q Ch. 15 - Prob. 6Q Ch. 15 - Prob. 7Q Ch. 15 - Prob. 8Q Ch. 15 - Prob. 9Q Ch. 15 - Prob. 10Q

Ch. 15 - Prob. 11Q Ch. 15 - Prob. 12Q Ch. 15 - Prob. 13Q Ch. 15 - Prob. 14Q Ch. 15 - Prob. 15Q Ch. 15 - Prob. 16Q Ch. 15 - Prob. 17Q Ch. 15 - Prob. 18Q Ch. 15 - Prob. 19Q Ch. 15 - Prob. 20Q Ch. 15 - Prob. 15.1BE Ch. 15 - Prob. 15.2BE Ch. 15 - Prob. 15.3BE Ch. 15 - Prob. 15.4BE Ch. 15 - Prob. 15.5BE Ch. 15 - Prob. 15.6BE Ch. 15 - Prob. 15.7BE Ch. 15 - Prob. 15.8BE Ch. 15 - Prob. 15.9BE Ch. 15 - Prob. 15.10BE Ch. 15 - Prob. 15.11BE Ch. 15 - Prob. 15.12BE Ch. 15 - Prob. 15.13BE Ch. 15 - Prob. 15.1DIE Ch. 15 - Prob. 15.2ADIE Ch. 15 - Prob. 15.2BDIE Ch. 15 - Prob. 15.3DIE Ch. 15 - Prob. 15.4DIE Ch. 15 - E15-1 Nick Bosch has prepared the following list...Ch. 15 - Prob. 15.2E Ch. 15 - Prob. 15.3E Ch. 15 - Prob. 15.4E Ch. 15 - Prob. 15.5E Ch. 15 - Prob. 15.6E Ch. 15 - Prob. 15.7E Ch. 15 - Prob. 15.8E Ch. 15 - Prob. 15.9E Ch. 15 - Prob. 15.10E Ch. 15 - Prob. 15.11E Ch. 15 - Prob. 15.12E Ch. 15 - Prob. 15.13E Ch. 15 - Prob. 15.14E Ch. 15 - Prob. 15.15E Ch. 15 - Prob. 15.16E Ch. 15 - Prob. 15.17E Ch. 15 - Prob. 15.18E Ch. 15 - Prob. 15.1AP Ch. 15 - Prob. 15.2AP Ch. 15 - Prob. 15.3AP Ch. 15 - P15-4A Talkington Electronics issues a $400,000,...Ch. 15 - P15-5A Presented below are three different lease...Ch. 15 - Prob. 15.6AP Ch. 15 - Prob. 15.7AP Ch. 15 - Prob. 15.8AP Ch. 15 - Prob. 15.9AP Ch. 15 - Prob. 15.10AP Ch. 15 - Prob. 15.1BYP Ch. 15 - Prob. 15.2BYP Ch. 15 - Prob. 15.3BYP Ch. 15 - Prob. 15.5BYP Ch. 15 - BYP15-6 Sam Masasi, president of Masasi...Ch. 15 - Prob. 15.7BYP Ch. 15 - Prob. 15.8BYP Ch. 15 - Prob. 15.1IFRS Ch. 15 - Prob. 15.2IFRS Ch. 15 - Prob. 15.3IFRS Ch. 15 - Prob. 15.4IFRS

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