(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:
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 $2,090,000 with 6% stated rate.
The face
Journal Entry for issuance of bonds on premium
| Particulars | Debit ($) | 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.
(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.
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) =
Interest Payment (semi-annual) = $60,000
Premium Amortization = Premium/No. of periods
Wherein, no. of periods =
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) = $57,000.
(c)
Introduction:
A bond is long term liability wherein the issuer is entitled to pay the face value of the bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.
To record:
Journal entry for the recognizing interest expense and interest payment on bonds.
Answer to Problem 70E
Journal Entry to recognize interest and interest payment
| Date | Particulars | Debit ($) | 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 |
(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.
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 =
Interest Expense for year 2020 =
Interest Expense for year 2020 = $114,000.
(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.
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
(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.
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
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