Chapter 9, Problem 80E

To determine

(a)

Introduction:

As per the effective interest rate method, a constant interest rate on book or carrying value is assigned to each period.

To record:

Journal entry for the issuance of Bonds.

Answer to Problem 80E

Journal Entry for issuance of Bonds at premium

Date	Particulars	Debit ($)	Credit ($)
1st January 2020	Cash Dr. Bonds Payable Premium on Bonds Payable	155,989	150,000 5,989

Explanation of Solution

Given:

$150,000, stated rate 9% and effective rate 8% were issued at $155,989 for 5 years.

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 at premium

Date	Particulars	Debit ($)	Credit ($)
1st January 2020	Cash Dr. Bonds Payable Premium on Bonds Payable	155,989	150,000 5,989

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:

The interest payments on bonds.

Answer to Problem 80E

The interest payments on the bonds is $13,500.

Explanation of Solution

Given:

150,000, stated rate 9% and effective rate 8% were issued at $155,989 for 5 years.

The interest payment is calculated on the yield rate (i.e. effective rate of interest) whereas the interest expense is calculated on the stated rate of interest. Whereas, Interest Expense of bonds that were issued at premium is calculated by deducting the premium on bonds payable (for the period) from Interest Payment.

So, Interest payment can be calculated as:

Interest Payment = $\text{Face Value × Stated Rate }\times \frac{12}{12}$

Interest Payment = $\text{\$150,000 × 9\%}\times \frac{12}{12}$

Interest Payment = $13,500.

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 prepare:

The amortization table.

Answer to Problem 80E

Amortization table

Annual Period	Cash Payment (Credit)	Interest Expense (Debit)	Premium on Bonds Payable (Debit)	Premium on Bonds Payable Balance	Carrying Value
At issue				5,989	155,989
12/31/2019	13,500	12,479	1,021	4,968	154,968
12/31/2020	13,500	12,398	1,102	3,866	153,866
12/31/2021	13,500	12,309	1,191	2,675	152,675
12/31/2022	13,500	12,214	1,286	1,389	151,389
12/31/2023	13,500	12,111	1,389	0	150,000

Explanation of Solution

Given:

150,000, stated rate 9% and effective rate 8% were issued at $155,989 for 5 years.

Amortization table

Annual Period	Cash Payment (Credit)	Interest Expense (Debit)	Premium on Bonds Payable (Debit)	Premium on Bonds Payable Balance	Carrying Value
At issue				5,989	155,989
12/31/2019	13,500	12,479	1,021	4,968	154,968
12/31/2020	13,500	12,398	1,102	3,866	153,866
12/31/2021	13,500	12,309	1,191	2,675	152,675
12/31/2022	13,500	12,214	1,286	1,389	151,389
12/31/2023	13,500	12,111	1,389	0	150,000

Cash Payment = $\text{Face Value × Stated Rate }\times \frac{12}{12}$

Cash Payment = $\text{\$150,000 × 9\%}\times \frac{12}{12}$

Cash Payment = $13,500

Interest Expense = $\text{Carrying Value × Effective Rate }\times \frac{12}{12}$

Interest Expense = $\text{Carrying Value × 8\% }\times \frac{12}{12}$

Premium on Bonds Payable = Cash payment − Interest Expense

Premium on Bonds Payable Balance = Previous Year balance − Current year premium

Carrying Value = Previous Carrying Value − Change in Premium Balance.

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 record:

Journal entry to show interest expense and payment of interest for year 2019.

Answer to Problem 80E

Journal Entry (combined) to show interest expense and payment of interest for year 2019.

Date	Particulars	Debit ($)	Credit ($)
31st December 2019	Interest Expense Dr. Premium on Bonds Payable Cash	12,479 1,021	13,500

Explanation of Solution

Given:

$150,000, stated rate 9% and effective rate 8% were issued at $155,989 for 5 years.

Interest Expense of bonds that were issued at premium is calculated by deducting the premium on bonds payable (for the period) from Interest Payment.

Journal Entry to show interest expense for year ending on 31^st December 2019

Date	Particulars	Debit ($)	Credit ($)
31st December 2019	Interest Expense Dr. Premium on Bonds Payable Interest Payable	12,479 1,021	13,500

Journal Entry to interest payment for year ending on 31^st December 2019

Date	Particulars	Debit ($)	Credit ($)
31st December 2019	Interest PayableDr. Cash	13,500	13,500

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 calculate:

Interest Expense (annual) for year 2019 and 2020.

Answer to Problem 80E

The annual interest expense for year 2019 and 2020 is $12,479 and $12,398, respectively.

Explanation of Solution

Given:

$150,000, stated rate 9% and effective rate 8% were issued at $155,989 for 5 years.

Interest Expense of bonds that were issued at premium is calculated by deducting the premium on bonds payable (for the period) from Interest Payment.

Interest Expense (12/31/2019) = $\text{\$155,989 × 8\% × 1}$ = $12,479

Premium on Bonds Payable = $13,500 - $12,479 = $1,021

Carrying Value = $155,989 - $1,021 = $154,968

Interest Expense (12/31/2020) = $\text{\$}154,968\text{ × 8\% × 1}$ = $12,398

Premium on Bonds Payable = $13,500 - $12,398 = $1,102

Carrying Value = $154,968 - $1,102 = $153,866.