Chapter 9, Problem 4PA

1.

To determine

Prepare the journal entry to record the issuance of bonds as on 1^st January 2021, and the first two semiannual interest payments on June 30, 2021 and December 31, 2021.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Prepare the journal entry to record issuance of bonds payable as on 1^st January 2021.

Date	Account titles and Explanation	Debit	Credit
January 1, 2021	Cash	$600,000
	Bonds payable		$600,000
	(To record issuance of bonds payable at face value)

Table (1)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $600,000.
• Bonds payable is a long term liability, and it is increased. Therefore, credit bonds payable account for $600,000.

Prepare the journal entry to record the payment of semi- annual interest expense as on 30^th June 2021.

Date	Account titles and Explanation	Debit	Credit
June 30, 2021	Interest expense (1)	$24,000
	Cash		$24,000
	(To record payment of semiannual interest expenses)

Table (2)

• Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $24,000.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $24,000.

Prepare the journal entry to record the payment of semi- annual interest expense as on 30^th December 2021.

Date	Account titles and Explanation	Debit	Credit
December 31, 2021	Interest expense (1)	$24,000
	Cash		$24,000
	(To record payment of semi-annual interest expenses)

Table (3)

• Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $24,000.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $24,000.

Working note:

Calculate the semiannual interest expenses for the month of June 30 and December 31:

$\begin{array}{c}\text{Interest expense =}\text{Bonds payable}\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$600,000}\times \text{8\%}\times \frac{6}{12}\\ =\$24,000\end{array}$ (1)

Note: The first payment of semi-annual interest expense is from January to June (6 months) and the second payment of semi-annual interest expense is from July to December (6 months).

2.

To determine

Prepare the journal entry to record the issuance of bonds as on 1^st January 2021, and the first two semiannual interest payments on June 30, 2021 and December 31, 2021.

Explanation of Solution

Prepare the journal entry to record issuance of bonds payable as on 1^st January 2021.

Date	Account titles and Explanation	Debit	Credit
January 1, 2021	Cash	$544,795
	Discount on bonds payable (2)	$55,205
	Bonds payable		$600,000
	(To record issuance of bonds payable at discount)

Table (4)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $544,795.
• Discount on bonds payable is a contra liability, and it is increased. Therefore, debit discount on bonds payable account for $55,205.
• Bonds payable is a long term liability, and it is increased. Therefore, credit bonds payable account for $600,000.

Working note:

Calculate discount on bonds payable:

$\begin{array}{c}\text{Discount on bonds payable =}\text{Bonds payable }-\text{Cash}\\ \text{=}\text{\$600,000}-\$544,795\\ =\$55,205\end{array}$ (2)

Prepare the journal entry to record the payment of semi- annual interest expense as on 30^th June 2021.

Date	Account titles and Explanation	Debit	Credit
June 30, 2021	Interest expense (3)	$24,516
	Discount on bonds payable (5)		$516
	Cash (4)		$24,000
	(To record payment of semi- annual interest expenses)

Table (5)

• Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $24,516.
• Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $516.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $24,000.

Working notes:

Calculate interest expense:

$\begin{array}{c}\text{Interest expense =}\text{Bonds issued }\times \text{Market interest rate}\times \text{Time period}\\ =\$544,795\times 9\%\times \frac{6}{12}\\ =\$24,516\end{array}$ (3)

Calculate Cash amount:

$\begin{array}{c}\text{Cash =}\text{Bonds payable }\times \text{Stated interest rate}\times \text{Time period}\\ \text{=}\text{\$600,000}\times \text{8\%}\times \frac{6}{12}\\ =\$24,000\end{array}$ (4)

Calculate Discount on bonds payable:

$\begin{array}{c}\text{Discount on bonds payable = Interest expense}\text{(3)}-\text{Cash}\text{(4)}\\ \text{=}\text{\$24,516}-\$24,000\\ =\$516\end{array}$ (5)

Prepare the journal entry to record the payment of semi- annual interest expense as on 31^st December 2021.

Date	Account titles and Explanation	Debit	Credit
December 31, 2021	Interest expense (6)	$24,539
	Discount on bonds payable (8)		$539
	Cash (7)		$24,000
	(To record payment of semi- annual interest expenses)

Table (6)

• Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $24,539.
• Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $539.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $24,000.

Working notes:

Calculate interest expense:

$\begin{array}{c}\text{Interest expense =}\text{Cash }\times \text{Market interest rate}\times \text{Time period}\\ =\left(\$544,795+\$516\right)\times 9\%\times \frac{6}{12}\\ =\$24,539\end{array}$ (6)

Calculate Cash amount:

$\begin{array}{c}\text{Cash =}\text{Bonds payable }\times \text{Stated interest rate}\times \text{Time period}\\ \text{=}\text{\$600,000}\times \text{8\%}\times \frac{6}{12}\\ =\$24,000\end{array}$ (7)

Calculate Discount on bonds payable:

$\begin{array}{c}\text{Discount on bonds payable = Interest expense }-\text{Cash}\\ \text{=}\text{\$24,539}(6)-\$24,000(7)\\ =\$539\end{array}$ (8)

3.

To determine

Prepare the journal entry to record the issuance of bonds as on 1^st January 2021, and the first two semiannual interest payments on June 30, 2021 and December 31, 2021.

Explanation of Solution

Prepare the journal entry to record issuance of bonds payable as on 1^st January 2021.

Date	Account titles and Explanation	Debit	Credit
January 1, 2021	Cash	$664,065
	Premium on bonds payable (9)		$64,065
	Bonds payable		$600,000
	(To record issuance of bonds payable at premium)

Table (7)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $664,065.
• Premium on bonds payable is an adjunct liability, and it is increased. Therefore, credit discount on bonds payable account for $64,065.
• Bonds payable is a long term liability, and it is increased. Therefore, credit bonds payable account for $600,000.

Working note:

Calculate premium on bonds payable:

$\begin{array}{c}\text{Premium on bonds payable =}\text{Cash}-\text{Bonds payable}\\ \text{=}\text{\$664,065}-\$600,000\\ =\$64,065\end{array}$ (9)

Prepare the journal entry to record the payment of semi- annual interest expense as on 30^th June 2021.

Date	Account titles and Explanation	Debit	Credit
June 30, 2021	Interest expense (10)	$23,242
	Premium on bonds payable (12)	$758
	Cash (11)		$24,000
	(To record payment of semi- annual interest expenses)

Table (8)

• Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $23,242.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit discount on bonds payable account for $758.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $24,000.

Working notes:

Calculate interest expense:

$\begin{array}{c}\text{Interest expense =}\text{Cash }\times \text{Market Interest rate}\times \text{Time period}\\ =\$664,065\times 7\%\times \frac{6}{12}\\ =\$23,242\end{array}$ (10)

Calculate Cash amount:

$\begin{array}{c}\text{Cash =}\text{Bonds payable }\times \text{Stated interest rate}\times \text{Time period}\\ \text{=}\text{\$600,000}\times \text{8\%}\times \frac{6}{12}\\ =\$24,000\end{array}$ (11)

Calculate Premium on bonds payable:

$\begin{array}{c}\text{Premium on bonds payable = Cash }-\text{Interest expense}\\ \text{=}\text{\$24,000}\text{(11)}-\$23,242(10)\\ =\$758\end{array}$ (12)

Prepare the journal entry to record the payment of semi- annual interest expense as on 31^st December 2021.

Date	Account titles and Explanation	Debit	Credit
December 31, 2021	Interest expense (13)	$23,216
	Premium on bonds payable (15)	$784
	Cash (14)		$24,000
	(To record payment of semi- annual interest expenses)

Table (9)

• Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $23,216.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit discount on bonds payable account for $784.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $24,000.

Working notes:

Calculate interest expense:

$\begin{array}{c}\text{Interest expense =}\text{Cash }\times \text{Market interest rate}\times \text{Time period}\\ =\left(\$644,065–\$758\right)\times 7\%\times \frac{6}{12}\\ =\$23,216\end{array}$ (13)

Calculate Cash amount:

$\begin{array}{c}\text{Cash =}\text{Bonds payable }\times \text{Stated interest rate}\times \text{Time period}\\ \text{=}\text{\$600,000}\times \text{8\%}\times \frac{6}{12}\\ =\$24,000\end{array}$ (14)

Calculate Discount on bonds payable:

$\begin{array}{c}\text{Premium on bonds payable = Cash }-\text{Interest expense}\\ \text{=}\text{\$24,000}(14)-\$23,216(13)\\ =\$784\end{array}$ (15)