Q24E_1 - Horngren'S Financial And Managerial Accounting

Question

Journalizing bond transactions

Anderson Company issued $70,000 of 10-year, 9% bonds payable on January 1, 2018. Anderson Company pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line amortization method. The company can issue its bonds payable under various conditions.

Requirements

1. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment assuming the bonds were issued at face value. Explanations are not required.

2. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 92. Explanations are not required.

3. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 103. Explanations are not required.

4. Which bond price results in the most interest expense for Anderson Company?

Explain in detail.

Step-by-Step Solution

Answer

1. The cash account is debited with $70,000 and the bonds payable account is credited with $70,000.

Step 1: Journal entry for the issue of bonds and payment of interest

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$70,000
	Bonds Payable		$70,000
	(Being entry to record the issue of bond)
July 1, 2018	Interest Expense	$3,150
	Cash		$3,150
	(Entry for the payment of interest)

Step 2: calculation of interest expenses:

$\begin{array}{c}\mathrm{Coupon} \mathrm{Amount}=\mathrm{Par} \mathrm{Value}\times \mathrm{Coupon} \mathrm{Rate}\times \mathrm{Time} \mathrm{Period}\\ =\mathrm{\$}70,000\times 9\mathrm{\%}\times \frac{6}{12}\\ =\mathrm{\$}3,150\end{array}$

Step 3: Journal entry for the issue of bonds and payment of interest

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$64, 400
	Discount on Bonds Payable	$5,600
	Bonds Payable		$70,000
	(Being entry to record the issue of bond)
July 1, 2018	Interest Expense	$3,430
	Discount on Bonds Payable		$280
	Cash		$3,150
	(Entry for the payment of interest)

Step 4: Calculation of cash received on issue of bond and interest expenses:

$\begin{array}{c}\mathit{I}\mathit{s}\mathit{s}\mathit{u}\mathit{e}\mathit{ }\mathit{P}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathit{=}\mathit{P}\mathit{a}\mathit{r}\mathit{ }\mathit{V}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{\times }\frac{\mathit{\$}\mathit{92}}{\mathit{100}}\\ \mathit{=}\mathit{\$}\mathit{70}\mathit{,}\mathit{000}\mathit{\times }\frac{\mathit{\$}\mathit{92}}{\mathit{100}}\\ \mathit{=}\mathit{\$}\mathit{64}\mathit{,}\mathit{400}\end{array}$

$\begin{array}{c}\mathrm{Discount} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}=\mathrm{Par} \mathrm{Value}-\mathrm{Issue} \mathrm{Price}\\ =\mathrm{\$}70,000-\mathrm{\$}64,400\\ =\mathrm{\$}5,600\end{array}$

$\begin{array}{c}\mathrm{Discount} \mathrm{Amortize}=\frac{\mathrm{Discount} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}}{\text{Semi-annual Period}}\\ =\frac{\mathrm{\$}5,600}{10\times 2}\\ =\mathrm{\$}280\end{array}$

$\begin{array}{c}\mathrm{Interest} \mathrm{Expenses}=\mathrm{Discount} \mathrm{On} \mathrm{Bond} \mathrm{Amortized}+\mathrm{Coupon} \mathrm{Amount}\\ =\mathrm{\$}280+\mathrm{\$}3,150\\ =\mathrm{\$}3,430\end{array}$

Step 5: Journal entry for the issue of bonds and payment of interest

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$72,100
	Premium on Bonds Payable		$2,100
	Bonds Payable		$70,000
	(Being entry to record the issue of bond)
July 1, 2018	Interest Expense	$3,045
	Discount on Bonds Payable	$105
	Cash		$3,150
	(Entry for the payment of interest)

Step 6: Calculation of cash received on issue of bond and interest expenses

$\begin{array}{c}\mathrm{Issue} \mathrm{Price}=\mathrm{Par} \mathrm{Value}\times \frac{\mathrm{\$}103}{100}\\ =\mathrm{\$}70,000\times \frac{\mathrm{\$}103}{100}\\ =\mathrm{\$}72,100\end{array}$

$\begin{array}{c}\mathrm{Premium} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}=\mathrm{Issue} \mathrm{Price} \mathrm{ParValue}\\ =\mathrm{\$}72,100-\mathrm{\$}70,000\\ =\mathrm{\$}5,600\end{array}$

$\begin{array}{c}\mathrm{Premium} \mathrm{Amortize}=\frac{\mathrm{Premiumon} \mathrm{Bonds} \mathrm{Payable}}{\text{Semi-annual Period}}\\ =\frac{\mathrm{\$}2,100}{10\times 2}\\ =\mathrm{\$}105\end{array}$

$\begin{array}{c}\mathrm{Interest} \mathrm{Expenses}=\mathrm{Coupon} \mathrm{Amount}-\mathrm{Premium} \mathrm{on} \mathrm{Bond} \mathrm{Amortized}\\ =\mathrm{\$}3,150-\mathrm{\$}105\\ =\mathrm{\$}3,045\end{array}$

Step 7: Most interest expense

When the bonds are issued at discount it results the most interest expense for Anderson company. The interest expense on bond issue at discount is $3,430 because it includes the amortized value of discount on bonds payable.