Cornerstones of Financial Accounting
Cornerstones of Financial Accounting
4th Edition
ISBN: 9781337690881
Author: Jay Rich, Jeff Jones
Publisher: Cengage Learning
Question
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Chapter 9, Problem 70E
To determine

(a)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Journal entry for the issuance of bonds.

Expert Solution
Check Mark

Answer to Problem 70E

Journal Entry for issuance of bonds on premium

Particulars Debit ($) Credit ($)
Cash Dr.
Bonds Payable
Premium on Bonds Payable
2,090,000 2,000,000
90,000

Explanation of Solution

Given:

Bonds with face value of $2,000,000 sold for $2,090,000 with 6% stated rate.

The face value of bonds issued is recorded as bonds payable and any premium or discount on issue of bonds is recorded in separate “Premium on Bonds Payable” or “Discount on Bonds Payable” account whereas in case of issuance of bonds at par it is a regular journal entry where cash (asset) increased along with Bonds Payable (long term liability).

Journal Entry for issuance of bonds on premium

Particulars Debit ($) Credit ($)
Cash Dr.
Bonds Payable
Premium on Bonds Payable
2,090,000 2,000,000
90,000

Face Value of bonds = $2,000,000

Issue Price of bonds = $2,090,000

Issue Price of each bond = Face Value of each bonds + Premium on each bond

$2,090,000 = $2,000,000 + Premium on each bond

Premium on each bond = $2,090,000 - $2,000,000

Premium on each bond = $90,000.

To determine

(b)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

Semi-annual interest payable on bonds.

Expert Solution
Check Mark

Answer to Problem 70E

$57,000 will be paid as semi-annual interest on bonds.

Explanation of Solution

Given:

Bonds with face value of $2,000,000 sold for $2,090,000 with 6% stated rate.

If the bonds would have been issued at premium, then the Interest Expense for the period could have been calculated as:

Interest Expense (when bonds issued at premium) = Interest Expense − premium amortized

Similarly, in case of bonds issued at discount the interest expense is determined by adding the discount amortized for the period to the interest expense for the period.

Interest Payment (semi-annual) = $2,000,000×6%×612

Interest Payment (semi-annual) = $60,000

Premium Amortization = Premium/No. of periods

Wherein, no. of periods = 15×2 =30 (semi-annual interest)

So, Premium Amortization = $90,000/30

Premium Amortization = $3,000

Interest Expense (semi-annual) = Interest Payment - Premium Amortization

Interest Expense (semi-annual) = $60,000 - $3,000

Interest Expense (semi-annual) = $57,000.

To determine

(c)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Journal entry for the recognizing interest expense and interest payment on bonds.

Expert Solution
Check Mark

Answer to Problem 70E

Journal Entry to recognize interest and interest payment

Date Particulars Debit ($) Credit ($)
30th June Interest Expense Dr.
Premium on Bonds Payable Dr.
Cash
57,000
3,000
60,000

Explanation of Solution

Given:

Bonds with face value of $2,000,000 sold for $2,090,000 with 6% stated rate.

The borrower is entitled to pay interest periodically, unless stated otherwise.

As per the question, the interest is payable semi-annually on 30th June and 31st December.

Journal Entry to recognize interest and interest payment

Date Particulars Debit ($) Credit ($)
30th June Interest Expense Dr.
Premium on Bonds Payable Dr.
Cash
57,000
3,000
60,000
To determine

(d)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

Interest Expense for year 2020.

Expert Solution
Check Mark

Answer to Problem 70E

The interest expense for year 2020 will be $114,000.

Explanation of Solution

Interest Expense (semi-annual) = $57,000

Bonds were issued on 1st January 2020. This means there will be 2 semi-annual interest payments in the year 2020.

First interest payment will be made on 30th June 2020 and the second on 31st December 2020.

So, Interest Expense for year 2020 = 2×Semi-annual interest expense

Interest Expense for year 2020 = 2×$57,000

Interest Expense for year 2020 = $114,000.

To determine

(e)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To critically think:

About Yield rate of floating rate bonds.

Expert Solution
Check Mark

Answer to Problem 70E

Interest Expense would have been lower in case of bonds issued at premium.

Explanation of Solution

Floating Rate bonds are the bonds with variable interest rate.

Investors are attracted more towards the bonds with fixed interest rate as the interest payments won’t be fluctuating whereas interest rate and payment is unpredictable in case of floating rate bonds. Investors tend to earn a constant rate of return on their investment. Hence, they prefer fixed rate bonds over variable rate bonds. Thus, yield rate of bonds with variable interest rate is less as compared to bonds with fixed interest rate.

To determine

(f)

Introduction:

A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To decide:

Whether bonds should be issued at fixed or variable rate.

Expert Solution
Check Mark

Answer to Problem 70E

Firm should consider what level of financing is required to operate.

Explanation of Solution

Floating Rate bonds are the bonds with variable interest rate.

Investors are attracted more towards the bonds with fixed interest rate as the interest payments won’t be fluctuating whereas interest rate and payment is unpredictable in case of floating rate bonds.

Therefore, if the company require a huge sum of money then bonds should be issued at fixed rate as it will attract more investors and raising finance would become a comparatively easy task.

Although, if the firm require small amount from investors then they may issue bonds on variable interest rate. This will ultimately help them raise finances with variable interest payments liable on such debt (bonds).

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Chapter 9 Solutions

Cornerstones of Financial Accounting

Ch. 9 - Prob. 11DQCh. 9 - Prob. 12DQCh. 9 - Prob. 13DQCh. 9 - Prob. 14DQCh. 9 - Prob. 15DQCh. 9 - Prob. 16DQCh. 9 - Prob. 17DQCh. 9 - Prob. 18DQCh. 9 - Prob. 19DQCh. 9 - Prob. 20DQCh. 9 - Prob. 21DQCh. 9 - Prob. 22DQCh. 9 - Which of the following statements regarding bonds...Ch. 9 - Prob. 2MCQCh. 9 - If bonds are issued at 101.25, this means that a...Ch. 9 - What best describes the discount on bonds payable...Ch. 9 - The premium on bonds payable account is shown on...Ch. 9 - When bonds are issued by a company, the accounting...Ch. 9 - Prob. 7MCQCh. 9 - Bonds in the amount of $100,000 with a life of 10...Ch. 9 - Prob. 9MCQCh. 9 - Prob. 10MCQCh. 9 - Prob. 11MCQCh. 9 - Prob. 12MCQCh. 9 - Prob. 13MCQCh. 9 - Prob. 14MCQCh. 9 - Prob. 15MCQCh. 9 - Prob. 16MCQCh. 9 - Which of the following statements regarding the...Ch. 9 - Willow Corporations balance sheet showed the...Ch. 9 - Prob. 19MCQCh. 9 - McLaughlin Corporations balance sheet showed the...Ch. 9 - (Appendix 9A) The bond issue price is determined...Ch. 9 - Cornerstone Exercise 9-22 Reporting Long-Term Debt...Ch. 9 - Cornerstone Exercise 9-23 Issuance of Long-Term...Ch. 9 - Cornerstone Exercise 9-24 Issuance of Long-Term...Ch. 9 - Prob. 25CECh. 9 - Cornerstone Exercise 9-26 Debt Issued at Par On...Ch. 9 - Prob. 27CECh. 9 - Cornerstone ExerciseDebt Issued at a Premium...Ch. 9 - Cornerstone Exercise 9-29 Debt issued at a Premium...Ch. 9 - Cornerstone Exercise Debt Issued at a Premium...Ch. 9 - Prob. 31CECh. 9 - Cornerstone Exercise Bonds Issued at a Discount...Ch. 9 - Prob. 33CECh. 9 - Prob. 34CECh. 9 - Prob. 35CECh. 9 - Prob. 36CECh. 9 - Prob. 37CECh. 9 - Prob. 38CECh. 9 - Cornerstone Exercise Ratio Analysis Watterson...Ch. 9 - Cornerstone Exercise Ratio Analysis Blue...Ch. 9 - Cornerstone Exercise Ratio Analysis Red...Ch. 9 - Prob. 42CECh. 9 - Cornerstone Exercise (Appendix 9A) Bond Issue...Ch. 9 - Prob. 44BECh. 9 - Brief Exercise Issuance of Long-Term Debt Natalie...Ch. 9 - Prob. 46BECh. 9 - Prob. 47BECh. 9 - Brief Exercise Debt Issued at Par On January 1,...Ch. 9 - Prob. 49BECh. 9 - Prob. 50BECh. 9 - Brief Exercise Debt Issued at a Premium (Straight...Ch. 9 - Prob. 52BECh. 9 - Prob. 53BECh. 9 - Prob. 54BECh. 9 - Prob. 55BECh. 9 - Brief ExerciseBonds Issued at a Premium (Effective...Ch. 9 - Prob. 57BECh. 9 - Brief Exercise Bonds issued at a Premium...Ch. 9 - Brief Exercise Cost of Debt Financing Topple...Ch. 9 - Prob. 60BECh. 9 - Brief Exercise Ratio Analysis Whitten Corporations...Ch. 9 - Brief ExerciseRatio Analysis Valiant Corporation...Ch. 9 - Brief Exercise Ratio Analysis Trevor Corporation...Ch. 9 - Brief Exercise (Appendix 9A) Bond Issue Price On...Ch. 9 - Prob. 65BECh. 9 - Prob. 66ECh. 9 - Exercise Bond Premium and Discount Markway Inc. is...Ch. 9 - Exercise Bonds with Annual Interest Payments Kiwi...Ch. 9 - Exercise Issuance and Interest Amortization for...Ch. 9 - Prob. 70ECh. 9 - Prob. 71ECh. 9 - Exercise Interest Payments and Interest Expense...Ch. 9 - Prob. 73ECh. 9 - Prob. 74ECh. 9 - Prob. 75ECh. 9 - Prob. 76ECh. 9 - Prob. 77ECh. 9 - Prob. 78ECh. 9 - Prob. 79ECh. 9 - Prob. 80ECh. 9 - Prob. 81ECh. 9 - Prob. 82ECh. 9 - Prob. 83ECh. 9 - Prob. 84ECh. 9 - ExerciseInstallment Notes ABC bank loans $250,000...Ch. 9 - Prob. 86ECh. 9 - Cost of Debt Financing Stinson Corporations cost...Ch. 9 - Cost of Debt Financing Diamond Companys cost of...Ch. 9 - Ratio Analysis Rising Stars Academy provided the...Ch. 9 - Prob. 90ECh. 9 - Problem Reporting Long-Term Debt Fridley...Ch. 9 - Prob. 92PSACh. 9 - Prob. 93PSACh. 9 - Prob. 94PSACh. 9 - Prob. 95PSACh. 9 - Prob. 96PSACh. 9 - Prob. 97PSACh. 9 - Prob. 98PSACh. 9 - Prob. 99PSACh. 9 - Prob. 91PSBCh. 9 - Prob. 92PSBCh. 9 - Prob. 93PSBCh. 9 - Prob. 94PSBCh. 9 - Prob. 95PSBCh. 9 - Prob. 96PSBCh. 9 - Prob. 97PSBCh. 9 - Prob. 98PSBCh. 9 - Prob. 99PSBCh. 9 - Long-Term Debt and Ethics You arc the CFO of...Ch. 9 - Debtholders receive note contracts, one for each...Ch. 9 - Debtholders receive note contracts, one for each...Ch. 9 - Prob. 102.1CCh. 9 - Prob. 102.2CCh. 9 - Prob. 102.3CCh. 9 - Prob. 102.4CCh. 9 - Leverage Cook Corporation issued financial...Ch. 9 - Prob. 103.2CCh. 9 - Prob. 103.3CCh. 9 - Prob. 103.4CCh. 9 - Prob. 104.1CCh. 9 - Prob. 104.2CCh. 9 - Prob. 104.3CCh. 9 - Prob. 104.4CCh. 9 - Prob. 105.1CCh. 9 - Prob. 105.2CCh. 9 - Prob. 105.3CCh. 9 - Prob. 105.4CCh. 9 - Prob. 105.5CCh. 9 - Comparative Analysis: Under Armour, Inc., versus...Ch. 9 - Prob. 105.7CCh. 9 - Prob. 106.1CCh. 9 - Prob. 106.2CCh. 9 - Prob. 106.3C
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