Financial Accounting
Financial Accounting
4th Edition
ISBN: 9781259307959
Author: J. David Spiceland, Wayne M Thomas, Don Herrmann
Publisher: McGraw-Hill Education
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Chapter 9, Problem 9.4BP

1.

To determine

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

To Prepare: The journal entry to record the issuance of bonds as on 1st January 2018, and the first two semiannual interest payment on June 30, 2018 and December 31, 2018.

1.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry to record issuance of bonds payable as on 1st January 2018.

DateAccount titles and ExplanationDebitCredit
January 1, 2018Cash$3,000,000
 Bonds payable $3,000,000
(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 $3,000,000.

Bonds payable is a long term liability, and it is increased. Therefore, credit bonds payable account for $3,000,000.

Prepare the journal entry to record the payment of semi- annual interest expense as on 30th June 2018.

DateAccount titles and ExplanationDebitCredit
June 30, 2018Interest expense$135,000
 Cash $135,000
(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 $135,000.

Cash is a current asset, and it is decreased. Therefore, credit cash account for $135,000.

Prepare the journal entry to record the payment of semi- annual interest expense as on 30th June 2018.

DateAccount titles and ExplanationDebitCredit
December 31, 2018Interest expense$135,000
 Cash $135,000
(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 $135,000.

Cash is a current asset, and it is decreased. Therefore, credit cash account for $135,000.

Working note:

Calculate interest expenses.

Interest expense =Bonds payable×Interest rate ×Time period=$3,000,000×9%×612=$135,000

2.

To determine

To Prepare: The journal entry to record the issuance of bonds as on 1st January 2018, and the first two semiannual interest payment on June 30, 2018 and December 31, 2018.

2.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry to record issuance of bonds payable as on 1st January 2018.

DateAccount titles and ExplanationDebitCredit
January 1, 2018Cash$2,813,067
Discount on bonds payable (1)$186,933
 Bonds payable $3,000,000
(To record issuance of bonds payable at discount)

Table (4)

Cash is a current asset, and it is increased. Therefore, debit cash account for $2,813,067.

Discount on bonds payable is a contra liability, and it is increased. Therefore, debit discount on bonds payable account for $186,933.

Bonds payable is a long term liability, and it is increased. Therefore, credit bonds payable account for $3,000,000.

Working note:

Calculate discount on bonds payable.

Discount on bonds payable =Bonds payable Cash=$3,000,000$2,813,067=$186,933 (1)

Prepare the journal entry to record the payment of semi- annual interest expense as on 30th June 2018.

DateAccount titles and ExplanationDebitCredit
June 30, 2018Interest expense (2)$140,653
 Discount on bonds payable (4) $5,653
 Cash (3) $135,000
(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 $140,653.

Discount on bonds payable is a contra, and it is decreased. Therefore, credit discount on bonds payable account for $5,653.

Cash is a current asset, and it is decreased. Therefore, credit cash account for $135,000.

Working notes:

Calculate interest expense.

Interest expense =Cash ×Interest rate×Time period=$2,813,067×10%×612=$140,653 (2)

Calculate Cash amount.

Cash =Bonds payable ×Stated interest rate×Time period=$3,000,000×9%×612=$135,000 (3)

Calculate Discount on bonds payable.

Discount on bonds payable = Interest expense Cash=$186,933$135,000=$5,653 (4)

Prepare the journal entry to record the payment of semi- annual interest expense as on 31st December 2018.

DateAccount titles and ExplanationDebitCredit
December 31, 2018Interest expense (5)$140,936
 Discount on bonds payable (7) $5,936
 Cash (6) $135,000
(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 $140,936.

Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $5,936.

Cash is a current asset, and it is decreased. Therefore, credit cash account for $135,000.

Working notes:

Calculate interest expense.

Interest expense =Cash ×Interest rate×Time period=($2,813,067+$5,653)×10%×612=$140,936 (5)

Calculate Cash amount.

Cash =Bonds payable ×Stated interest rate×Time period=$3,000,000×9%×612=$135,000 (6)

Calculate Discount on bonds payable.

Discount on bonds payable = Interest expense Cash=$140,936$135,000=$5,936 (7)

3.

To determine

To Prepare: The journal entry to record the issuance of bonds as on 1st January 2018, and the first two semiannual interest payment on June 30, 2018 and December 31, 2018.

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry to record issuance of bonds payable as on 1st January 2018.

DateAccount titles and ExplanationDebitCredit
January 1, 2018Cash$3,203,855
 Premium on bonds payable (8) $203,855
 Bonds payable $3,000,000
(To record issuance of bonds payable at premium)

Table (7)

Cash is a current asset, and it is increased. Therefore, debit cash account for $3,203,855.

Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit discount on bonds payable account for $203,855.

Bonds payable is a long term liability, and it is increased. Therefore, credit bonds payable account for $3,000,000.

Working note:

Calculate premium on bonds payable.

Premium on bonds payable =CashBonds payable=$3,203,855$3,000,000=$203,855 (8)

Prepare the journal entry to record the payment of semi- annual interest expense as on 30th June 2018.

DateAccount titles and ExplanationDebitCredit
June 30, 2018Interest expense (9)$128,154
Premium on bonds payable (11)$6,846
 Cash (10) $135,000
(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 $128,154.

Premium on bonds payable is an adjunct liability, and it is increased. Therefore, credit discount on bonds payable account for $6,846.

Cash is a current asset, and it is decreased. Therefore, credit cash account for $135,000.

Working notes:

Calculate interest expense.

Interest expense =Cash ×Market Interest rate×Time period=$3,203,855×8%×612=$128,154 (9)

Calculate Cash amount.

Cash =Bonds payable ×Stated interest rate×Time period=$3,000,000×9%×612=$135,000 (10)

Calculate Premium on bonds payable.

Premium on bonds payable = Cash Interest expense=$135,000$128,154=$6,846 (11)

Prepare the journal entry to record the payment of semi- annual interest expense as on 31st December 2018.

DateAccount titles and ExplanationDebitCredit
December 31, 2018Interest expense (12)$127,880
Premium on bonds payable (14)$7,120
 Cash (13) $135,000
(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 $127,880.

Premium on bonds payable is an adjunct liability, and it is increased. Therefore, credit discount on bonds payable account for $7,120.

Cash is a current asset, and it is decreased. Therefore, credit cash account for $135,000.

Working notes:

Calculate interest expense.

Interest expense =Cash ×Interest rate×Time period=($3,203,855$6,846)×8%×612=$127,880 (12)

Calculate Cash amount.

Cash =Bonds payable ×Stated interest rate×Time period=$3,000,000×9%×612=$135,000 (13)

Calculate Discount on bonds payable.

Premium on bonds payable = Cash Interest expense=$135,000$127,880=$7,120 (14)

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