Concept explainers
Bonds:
Bonds are a kind of the security which an investor invests in an entity for a specific period at a fixed interest rate. These bonds are issued at that time when entity needs huge amount of fund.
1.
Explanation of Solution
Issue of bonds at premium on January 1, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
January 1 | Cash | 4,192,932 | ||
Premium on bonds payable | 792,932 | |||
Bonds payable | 3,400,000 | |||
(To record the sold bonds at premium) |
Table (1)
- Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.
- Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds Premium has been given which increase the liabilities of the company. So, credit the Premium on bonds payable account.
- Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.
2.
Cash payment, straight line amortization and bonds interest expense.
2.
Explanation of Solution
(a)
Given,
Amount of bond is $3,400,000.
Rate of interest is 10%.
Time period is 0.5.
Formula to calculate the cash at the time of issue of bond,
Substitute $3,400,000 for the bond value, 10% for the rate on interest and 0.5 for time period.
Hence, cash payment account is $170,000 .
(b)
Given,
Par value of bond is $3,400,000.
Issued
Number of semiannual period is 30.
Formula to calculate the straight line discount amortization,
Substitute $895,980 for the discount on bond and 30 for number of semiannual period.
Hence, amortization is $39,647.
Working note:
Calculation of discount on bond,
(c)
Given,
Cash payment is $170,000.
Amortization expense is $39,647.
Formula to calculate bonds interest payment expense,
Substitute $170,000 for cash payment and $39,647 for amortization.
Hence, bonds interest expense is $130,353.
3.
Total amount of interest payable on bond.
3.
Explanation of Solution
Particulars | Amounts($) |
20 Regular outlays of $170,000 | 3,400,000 |
Par value at maturity | 3,400,000 |
Net repaid | 6,800,000 |
Less: Money borrowed | 4,192,932 |
Bond interest expense | 2,607,068 |
Table (2)
Hence, total bond interest expense is $2,607,068.
4.
First two year of an amortization table.
4.
Explanation of Solution
End of semiannual period | UnamortizedDiscount ($) | Carrying value ($) |
January 1, 2017 | 792,932 | 4,192,932 |
June 30, 2017 | 753,285 | 4,153,285 |
December 31, 2017 | 713,638 | 4,113,638 |
June 30 ,2018 | 673,991 | 4,073,991 |
December 31, 2018 | 634,344 | 4,034,344 |
Table (3)
5.
To prepare: Journal entry to record the first two interest payment.
5.
Explanation of Solution
Payment of interest on June 30, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
June 30 | Bonds interest expense | 130,353 | ||
Premium on bonds payable | 39,647 | |||
Cash | 170,000 | |||
(To record the paid semiannual interest and record amortization) |
Table (4)
- Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account
- Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increases the liabilities of company. Now premium on bonds payable has been paid which decrease the liability. So, debit the premium on bonds payable account.
- Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.
Payment of interest on December 31, 2017
Date | Account Title and Explanation | Post.Ref. | Debit($) | Credit($) |
Dec 31 | Bonds interest expense | 130,353 | ||
Premium on bonds payable | 39,647 | |||
Cash | 170,000 | |||
(To record the paid semiannual interest and record amortization) |
Table (5)
- Bonds interest account is an expense account. Interest has been paid by the company which increases the liabilities of the company. So, debit the bonds interest expense account.
- Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increases the liabilities of company. Now premium on bonds payable has been paid which decrease the liability. So, debit the premium on bonds payable account.
- Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the cash account.
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Chapter 10 Solutions
FINANCIAL ACCT.FUND.(LOOSELEAF)
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