Question
Book Icon
Chapter 22, Problem 10SPA

1-(a)

To determine

Journalize the entry for the issuance of bonds in the books of Incorporation E.

1-(a)

Expert Solution
Check Mark

Explanation of Solution

Bonds: Bonds are the financial debt instruments issued by the corporations to raise capital for the purposes of purchasing assets, or paying debts. Bonds are bought by individual investors, or corporations, or mutual funds, and receive a fixed interest revenue.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the entry for the issuance of bonds in the books of Incorporation E.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-1    
April1Cash  485,000 
  Discount on Bonds Payable 15,000 
   Bonds Payable  500,000
   (Record issuance of bonds at discount)   

Table (1)

Description:

  • Cash is an asset account. The amount is increased because cash is received from the bond issue, and an increase in assets should be debited.
  • Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Therefore, the respective liability account is decreased, and a decrease in liability is debited.
  • Bonds Payable is a liability account. Since the liability to pay bonds has increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute the amount of cash received.

Cash received = {Face value of bonds × Bond price quotation percentage}=$500,000×97%=$485,000 (1)

Compute the amount of discount on bonds payable (unamortized discount).

Discount on bonds payable = {Face value of bondsCash received }=$500,000–$485,000=$15,000 (2)

Note: Refer to Equation (1) for value and computation of cash received.

(b)

To determine

Journalize the entry for the semiannual interest payment and discount amortization in the books of Incorporation E.

(b)

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry for the semiannual interest payment and discount amortization in the books of Incorporation E.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-1    
September30Bond Interest Expense 20,375 
   Discount on Bonds Payable  375
   Cash  20,000
   (Record payment of semiannual interest and the amortization of discount)   

Table (2)

Description:

  • Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the discount is amortized, the discount value is reduced, and a decrease in contra-liability is credited.
  • Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.

Working Notes:

Compute the cash paid.

Cash paid = {Face value of the bonds×Stated interest rate×Semiannual interest payment period}=$500,000×8%×12=$20,000 (3)

Compute the amount of amortized discount.

Discount amortized = {Unamortized discountLife of the bonds×Semiannual interest payment period}=$15,00020 years×12=$375 (4)

Note: Refer to Equation (2) for value and computation of unamortized discount.

Compute the amount of bond interest expense.

Bond interest expense = Cash paid+Discount amortized=$20,000+$375=$20,375 (5)

Note: Refer to Equation (3) and (4) for both the values.

(c)

To determine

Journalize the entry for the year-end adjustment in the books of Incorporation E.

(c)

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry for the year-end adjustment in the books of Incorporation E.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-1    
December31Bond Interest Expense 10,187.50 
   Discount on Bonds Payable  187.50
   Bond Interest Payable  10,000.00
   (Record interest expense accrued)   

Table (3)

Description:

  • Bond Interest Expense is an expense account. Since the interest is accrued, the interest expense increased. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the discount is amortized, the discount value is reduced, and a decrease in contra-liability is credited.
  • Bond Interest Payable is a liability account. Since the liability to pay interest has increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute the accrued bond interest payable amount.

Accrued bond interest payable = {Face value of the bonds×Stated interest rate×Period of the interest accrued(October 1 to December 31)}=$500,000×8%×312=$10,000 (6)

Compute the amount of amortized discount.

Discount amortized = {Unamortized discountLife of the bonds×Accrued interest period}=$15,00020 years×312=$187.50 (7)

Note: Refer to Equation (2) for value and computation of unamortized discount.

Compute the amount of bond interest expense.

Bond interest expense = Accrued bond interest payable+Discount amortized=$10,000+$187.50=$10,187.50 (8)

Note: Refer to Equation (6) and (7) for both the values.

(d)

To determine

Journalize the entry to reverse the year-end adjustment in the books of Incorporation E.

(d)

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry to reverse the year-end adjustment in the books of Incorporation E.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-2    
January1Bond Interest Payable 10,000.00 
  Discount on Bonds Payable 187.50 
   Bond Interest Expense  10,187.50
   (Record reversing entry for the accrued interest expense)   

Table (4)

Description:

  • Bond Interest Payable is a liability account. Since the entry is reversed, liability which was credited earlier is debited now.
  • Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the entry is reversed, the liability which was credited earlier is debited now.
  • Bond Interest Expense is an expense account. Since the entry is reversed, the stockholders’ equity which was debited earlier is credited now.

Note: Refer to Equations (6), (7), and (8) for the computation of all values.

(e)

To determine

Journalize the entry for the semiannual interest payment and discount amortization for 20-2, in the books of Incorporation E.

(e)

Expert Solution
Check Mark

Explanation of Solution

Journalize the entry for the semiannual interest payment and discount amortization in the books of Incorporation E, on September 30.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-2    
September30Bond Interest Expense 20,375 
   Discount on Bonds Payable  375
   Cash  20,000
   (Record payment of semiannual interest and the amortization of discount)   

Table (5)

Description:

  • Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the discount is amortized, the discount value is reduced, and a decrease in contra-liability is credited.
  • Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.

Note: Refer to Equations (3), (4), and (5) for both the values.

Journalize the entry for the semiannual interest payment and discount amortization in the books of Incorporation E, on March 31.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-2    
March31Bond Interest Expense 20,375 
   Discount on Bonds Payable  375
   Cash  20,000
   (Record payment of semiannual interest and the amortization of discount)   

Table (6)

Description:

  • Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Discount on Bonds Payable account is a contra-liability account, the account which decreases the balance of the respective liability account. Since the discount is amortized, the discount value is reduced, and a decrease in contra-liability is credited.
  • Cash is an asset account. The amount is decreased because cash is paid, and a decrease in assets should be credited.

Note: Refer to Equations (3), (4), and (5) for both the values.

2.

To determine

Compute the amount of carrying value of the bonds on September 30, 20-2.

2.

Expert Solution
Check Mark

Explanation of Solution

Carrying value: The carrying value of a bond is the sum of face value and the unamortized premium or the difference between the face value and the amortized discount. This is the value that is recorded on the balance sheet and is also referred to as book value.

Prepare a bond discount amortization schedule to compute the amount of carrying value of the bonds on September 30, 20-2.

Date

Interest Expense Debit

(1)

Discount on Bonds Payable Credit

(2)

Cash Credit

(3)

Bonds Payable Balance

(4)

Discount on Bonds Payable

(5)

Carrying Value of Bonds

(6)

   [(1)(2)]  [(5)(2)] [(4)(5)]
4/01/-1   $500,000$15,000$485,000
9/30/-1$20,375$375$20,000500,00014,625485,375
3/31/-220,37537520,000500,00014,250485,750
9/30/-220,37537520,000500,00013,875$486,125

Table (7)

Note: Refer to Requirement (1) for the computation of all values.

Conclusion

Thus, the amount of carrying value of the bonds on September 30, 20-2 is $486,125.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
What is the cost of goods sold for this general accounting question?
What is the company's Debt to equity ratio on these general accounting question?
Need help with this general accounting question

Chapter 22 Solutions

Bundle: College Accounting, Chapters 1-9, Loose-Leaf Version, 22nd + LMS Integrated for CengageNOWv2, 2 terms Printed Access Card for Heintz/Parry's College Accounting, Chapters 1-27, 22nd

Ch. 22 - Prob. 1CECh. 22 - Prob. 2CECh. 22 - Prob. 3CECh. 22 - Prob. 4CECh. 22 - Prob. 5CECh. 22 - Prob. 1RQCh. 22 - Prob. 2RQCh. 22 - Prob. 3RQCh. 22 - Prob. 4RQCh. 22 - What accounts are affected when bonds are issued...Ch. 22 - Prob. 6RQCh. 22 - Prob. 7RQCh. 22 - Prob. 8RQCh. 22 - Prob. 9RQCh. 22 - When bonds are redeemed before maturity, how is...Ch. 22 - Prob. 11RQCh. 22 - How should sinking fund earnings be reported on...Ch. 22 - Prob. 13RQCh. 22 - Prob. 1SEACh. 22 - Prob. 2SEACh. 22 - Prob. 3SEACh. 22 - REDEMPTION OF BONDS ISSUED AT FACE VALUE Levesque...Ch. 22 - REDEMPTION OF BONDS ISSUED AT A PREMIUM Brighton...Ch. 22 - REDEMPTION OF BONDS ISSUED AT A DISCOUNT...Ch. 22 - BOND SINKING FUNDS M. J. Adams Corporation pays...Ch. 22 - BONDS ISSUED AT FACE VALUE Ito Co. issued the...Ch. 22 - Prob. 9SPACh. 22 - Prob. 10SPACh. 22 - Prob. 11SPACh. 22 - Prob. 12SPACh. 22 - BONDS ISSUED AT FACE VALUE WITH SINKING FUND...Ch. 22 - Prob. 1SEBCh. 22 - Prob. 2SEBCh. 22 - Prob. 3SEBCh. 22 - Prob. 4SEBCh. 22 - Prob. 5SEBCh. 22 - REDEMPTION OF BONDS ISSUED AT A DISCOUNT Medina...Ch. 22 - Prob. 7SEBCh. 22 - BONDS ISSUED AT FACE VALUE Ramona Arroyo Co....Ch. 22 - Prob. 9SPBCh. 22 - Prob. 10SPBCh. 22 - Prob. 11SPBCh. 22 - BONDS ISSUED AT A DISCOUNT, REDEEMED AT A GAIN...Ch. 22 - BONDS ISSUED AT FACE VALUE WITH SINKING FUND...Ch. 22 - MANAGING YOUR WRITING The business where you work...Ch. 22 - Prob. 1ECCh. 22 - MASTERY PROBLEM Jackson, Inc.s fiscal year ends...Ch. 22 - CHALLENGE PROBLEM This problem challenges you to...
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
College Accounting, Chapters 1-27
Accounting
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:Cengage Learning,
Text book image
Financial Accounting
Accounting
ISBN:9781337272124
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Text book image
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Text book image
Excel Applications for Accounting Principles
Accounting
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Cengage Learning
Text book image
College Accounting, Chapters 1-27 (New in Account...
Accounting
ISBN:9781305666160
Author:James A. Heintz, Robert W. Parry
Publisher:Cengage Learning
Text book image
Century 21 Accounting Multicolumn Journal
Accounting
ISBN:9781337679503
Author:Gilbertson
Publisher:Cengage