College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
22nd Edition
ISBN: 9781305666160
Author: James A. Heintz, Robert W. Parry
Publisher: Cengage Learning
Question
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Chapter 22, Problem 9SPA

1-(a)

To determine

Journalize the entry for the issuance of bonds in the books of Corporation B.

1-(a)

Expert Solution
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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 Corporation B.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-1    
March1Cash  824,000 
   Bonds Payable  800,000
   Premium on Bonds Payable  24,000
   (Record issuance of bonds at premium)   

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.
  • Bonds Payable is a liability account. Since the liability to pay bonds has increased, liability increased, and an increase in liability is credited.
  • Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Therefore, the respective liability account is 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}=$800,000×103%=$824,000 (1)

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

Premium on bonds payable = {Cash received – Face value of bonds}=$824,000–$800,000=$24,000 (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 premium amortization in the books of Corporation B.

(b)

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Explanation of Solution

Journalize the entry for the semiannual interest payment and premium amortization in the books of Corporation B.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-1    
August31Bond Interest Expense 30,800 
  Premium on Bonds Payable 1,200 
   Cash  32,000
   (Record payment of semiannual interest and the amortization of premium)   

Table (2)

Description:

  • Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
  • 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}=$800,000×8%×12=$32,000 (3)

Compute the amount of amortized premium.

Premium amortized = {Unamortized premiumLife of the bonds×Semiannual interest payment period}=$24,00010 years×12=$1,200 (4)

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

Compute the amount of bond interest expense.

Bond interest expense = Cash paid–Premium amortized=$32,000–$1,200=$30,800 (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 Corporation B.

(c)

Expert Solution
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Explanation of Solution

Journalize the entry for the year-end adjustment in the books of Corporation B.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-1    
December31Bond Interest Expense 20,533.33 
  Premium on Bonds Payable 800.00 
   Bond Interest Payable  21,333.33
   (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.
  • Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
  • 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(August 31 to December 31)}=$800,000×8%×412=$21,333.33 (6)

Compute the amount of amortized premium.

Premium amortized = {Unamortized premiumLife of the bonds×Accrued interest period}=$24,00010 years×412=$800 (7)

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

Compute the amount of bond interest expense.

Bond interest expense = Bond interest payable–Premium amortized=$21,333.33–$800=$20,533.33 (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 Corporation B.

(d)

Expert Solution
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Explanation of Solution

Journalize the entry to reverse the year-end adjustment in the books of Corporation B.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-2    
January1Bond Interest Payable 21,333.33 
   Bond Interest Expense  20,533.33
   Premium on Bonds Payable  800.00
   (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.
  • Bond Interest Expense is an expense account. Since the entry is reversed, the stockholders’ equity which was debited earlier is credited now.
  • Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the entry is reversed, the liability which was debited earlier is credited now.

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

(e)

To determine

Journalize the entry for the semiannual interest payment and premium amortization in the books of Corporation B.

(e)

Expert Solution
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Explanation of Solution

Journalize the entry for the semiannual interest payment and premium amortization on February 28.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-2    
February28Bond Interest Expense 30,800 
  Premium on Bonds Payable 1,200 
   Cash  32,000
   (Record payment of semiannual interest and the amortization of premium)   

Table (5)

Description:

  • Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
  • 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 premium amortization on August 31.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
20-2    
August31Bond Interest Expense 30,800 
  Premium on Bonds Payable 1,200 
   Cash  32,000
   (Record payment of semiannual interest and the amortization of premium)   

Table (6)

Description:

  • Bond Interest Expense is an expense account. Expenses reduce the stockholders’ equity account, and a decrease in equity is debited.
  • Premium on Bonds Payable account is an adjunct-liability account, the account which increases the balance of the respective liability account. Since the premium is amortized, the premium value is reduced, and a decrease in liability is debited.
  • 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 August 31, 20-2.

2.

Expert Solution
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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 premium amortization schedule to compute the amount of carrying value of the bonds on August 31, 20-2.

Date

Interest Expense Debit

(1)

Premium on Bonds Payable Debit

(2)

Cash Credit

(3)

Bonds Payable Balance

(4)

Premium on Bonds Payable

(5)

Carrying Value of Bonds

(6)

   [(1)+(2)]  [(5)(2)] [(4)+(5)]
3/01/-1   $800,000$24,000$824,000
8/31/-1$30,800$1,200$32,000800,00022,800822,800
2/28/-230,8001,20032,000800,00021,600821,600
8/31/-230,8001,20032,000800,00020,400$820,400

Table (7)

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

Conclusion

Thus, the amount of carrying value of the bonds on August 31, 20-2 is $820,400.

3.

To determine

Prepare a partial balance sheet for Corporation B, as on August 31, 20-2, to show the bonds payable section.

3.

Expert Solution
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Explanation of Solution

Prepare a partial balance sheet for Corporation B, as on August 31, 20-2, to show the bonds payable section.

Corporation B
Balance Sheet (Partial)
August 30, 20-2
Long-term liabilities:  
 Bonds payable$800,000 
 Premium on bonds payable20,400$820,400

Table (8)

Note: Refer to Requirement (2) for the computation of all values.

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Students have asked these similar questions
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Recording Bond Entries and Preparing an Amortization Schedule- Effective Interest Method, Discount, Interest Accrual Mitchell Inc. issued 200 of its 6%, $1,000 bonds on January 1 of Year 1. The bonds pay cash interest semiannually each July 1 and January 1 and were issued to yield 7%. The bonds mature in three years on December 31, and the company uses the effective interest method to amortize bond discounts or premiums. Required a. Determine the selling price of the bonds. b. Prepare an amortization schedule for the first year of the bond term. c. Prepare journal entries on the following dates. 1. January 1 of Year 1, bond issuance. 2. July 1 of Year 1, interest payment. 3. December 31 of Year 1, interest accrual. 4. January 1 of Year 2, interest payment. (No reversing entries made.)

Chapter 22 Solutions

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

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...
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