Chapter 22, Problem 9SPB

1-(a)

To determine

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

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 W.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-1
March	1	Cash			257,500
			Bonds Payable			250,000
			Premium on Bonds Payable			7,500
		(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.

$\begin{array}{c}\text{Cash received = }\left\{\begin{array}{l}\text{Face value of bonds × }\\ \text{Bond price quotation percentage}\end{array}\right\}\\ \text{=\$250,000×103\%}\\ \text{=\$257,500}\end{array}$ (1)

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

$\begin{array}{c}\text{Premium on bonds payable = }\left\{\begin{array}{l}\text{Cash received – }\\ \text{Face value of bonds}\end{array}\right\}\\ \text{=\$257,500–\$250,000}\\ \text{=\$7,500}\end{array}$ (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 W.

Explanation of Solution

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-1
August	31	Bond Interest Expense			9,812.50
		Premium on Bonds Payable			187.50
			Cash			10,000.00
		(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.

$\begin{array}{c}\text{Cash paid = }\left\{\begin{array}{l}\text{Face value of the bonds×}\\ \text{Stated interest rate×}\\ \text{Semiannual interest payment period}\end{array}\right\}\\ \text{=\$250,000×8\%×}\frac{\text{1}}{\text{2}}\\ \text{=\$10,000}\end{array}$ (3)

Compute the amount of amortized premium.

$\begin{array}{c}\text{Premium amortized = }\left\{\begin{array}{l}\frac{\text{Unamortized premium}}{\text{Life of the bonds}}\text{×}\\ \text{Semiannual interest payment period}\end{array}\right\}\\ \text{=}\frac{\text{\$7,500}}{\text{20 years}}\text{×}\frac{\text{1}}{\text{2}}\\ \text{=\$187}\text{.50}\end{array}$ (4)

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

Compute the amount of bond interest expense.

$\begin{array}{c}\text{Bond interest expense = Cash paid–Premium amortized}\\ \text{=\$10,000}\text{.00–\$187}\text{.50}\\ \text{=\$9,812}\text{.50}\end{array}$ (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 W.

Explanation of Solution

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-1
December	31	Bond Interest Expense			6,541.67
		Premium on Bonds Payable			125.00
			Bond Interest Payable			6,666.67
		(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.

$\begin{array}{c}\text{Accrued bond interest payable = }\left\{\begin{array}{l}\text{Face value of the bonds×}\\ \text{Stated interest rate×}\\ \text{Period of the interest accrued}\\ \left(\text{August 31 to December 31}\right)\end{array}\right\}\\ \text{=\$250,000×8\%×}\frac{4}{\text{12}}\\ \text{=\$6,666}\text{.67}\end{array}$ (6)

Compute the amount of amortized premium.

$\begin{array}{c}\text{Premium amortized = }\left\{\begin{array}{l}\frac{\text{Unamortized premium}}{\text{Life of the bonds}}\text{×}\\ \text{Accrued interest period}\end{array}\right\}\\ \text{=}\frac{\text{\$7,500}}{\text{20 years}}\text{×}\frac{4}{\text{12}}\\ \text{=\$125}\end{array}$ (7)

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

Compute the amount of bond interest expense.

$\begin{array}{c}\text{Bond interest expense = Bond interest payable–Premium amortized}\\ \text{=\$6,666}\text{.67–\$125}\\ \text{=\$6,541}\text{.67}\end{array}$ (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 W.

Explanation of Solution

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-2
January	1	Bond Interest Payable			6,666.67
			Bond Interest Expense			6,541.67
			Premium on Bonds Payable			125.00
		(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 W.

Explanation of Solution

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-2
February	28	Bond Interest Expense			9,812.50
		Premium on Bonds Payable			187.50
			Cash			10,000.00
		(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 all the values.

Journalize the entry for the semiannual interest payment and premium amortization on August 31.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20-2
August	31	Bond Interest Expense			9,812.50
		Premium on Bonds Payable			187.50
			Cash			10,000.00
		(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 all the values.

2.

To determine

Compute the amount of carrying value of the bonds on August 31, 20-2.

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)
			$\begin{array}{c}\left[\left(1\right)+\left(2\right)\right]\end{array}$		$\begin{array}{c}\left[\left(5\right)–\left(2\right)\right]\end{array}$	$\begin{array}{c}\left[\left(4\right)+\left(5\right)\right]\end{array}$
3/01/-1				$250,000	$7,500.00	$257,500.00
8/31/-1	$9.812.50	$187.50	$10,000	250,000	7,312.50	257,312.50
2/28/-2	9,812.50	187.50	10,000	250,000	7,125.00	257,125.00
8/31/-2	9,812.50	187.50	10,000	250,000	6,937.50	$256,937.50

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 $256,937.50.