Q31E_1 - Horngren'S Financial And Managerial Accounting

Question

Journalizing bond transactions using the effective-interest

amortization method

Journalize issuance of the bond and the first semiannual interest payment undereach of the following three assumptions. The company amortizes bond premiumand discount by the effective-interest amortization method. Explanations are notrequired.

1. Seven-year bonds payable with face value of \(83,000 and stated interest rate of10%, paid semiannually. The market rate of interest is 10% at issuance. The presentvalue of the bonds at issuance is \)83,000.

2. Same bonds payable as in assumption 1, but the market interest rate is 16%. Thepresent value of the bonds at issuance is \(62,433.

3. Same bonds payable as in assumption 1, but the market interest rate is 8%. Thepresent value of the bonds at issuance is \)91,727.

Step-by-Step Solution

Answer

1. The cash account is debited with $83,000 and the bonds payable account is credited with $83,000.

Interest expenses debited by $4,150 and cash is credited by $4,150.

2. The Cash and discount on issue of bond is debited by $62,433 and $20,567 and bonds payable credited by $83,000.

Interest expenses debited by $4,995. Discount and cash credited by $845 and $4,150.

3. The cash debited by $91,727. The premium on bonds payable and bonds payable credited by $8,727 and $83,000.

Interest expenses and premium on bonds payable debited by $3,670 and $480. The cash credited by $4,150.

Step 1: Definition of bonds issued at par

When the stated interest rate is equal to the market interest rate, these bonds are known as bonds issued at par.

Step 2: Journal entries

S.no.	Date	Accounts and Explanations	Debit	Credit
1,		Cash	$83,000
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$4,150
		Cash		$4,150
		(To record the payment of interest)
2.		Cash	$62,433
		Discount on 10% Bonds Payable	$20,567
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$4,995
		Discount on Bonds Payable		$845
		Cash		$4,150
		(To record the payment of interest)
3.		Cash	$91,727
		Premium on 10% Bonds Payable		$8,727
		10% Bonds Payable		$83,000
		(To record the issuance of bonds)
		Interest Expense	$3,670
		Premium on Bonds Payable	$480
		Cash		$4,150
		(To record the payment of interest)

 

Step 2: Calculation of interest expenses (Part 1):

$\begin{array}{c}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{\times }\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{T}\mathbf{i}\mathbf{m}\mathbf{e}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{12}}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\end{array}$

 

Calculation of discount allowed and interest expenses (part 2):

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{A}\mathbf{l}\mathbf{l}\mathbf{o}\mathbf{w}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{d}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{433}\\ \mathbf{=}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{567}\end{array}$

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{O}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{\times }\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{62}\mathbf{,}\mathbf{433}\mathbf{\times }\mathbf{16}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{995}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{845}\end{array}$

$\begin{array}{c}\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{E}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{=}\mathbf{D}\mathbf{i}\mathbf{s}\mathbf{c}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{O}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{+}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{845}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{995}\end{array}$

Calculation of premium amount and interest expenses (part 3):

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{=}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{d}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{-}\mathbf{P}\mathbf{a}\mathbf{r}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\\ \mathbf{=}\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{727}\mathbf{-}\mathbf{\$}\mathbf{83}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{727}\end{array}$

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{=}\mathbf{C}\mathbf{o}\mathbf{u}\mathbf{p}\mathbf{o}\mathbf{n}\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{I}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{\times }\mathbf{I}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{R}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{727}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{670}\\ \mathbf{=}\mathbf{\$}\mathbf{480}\end{array}$

$\begin{array}{c}\mathbf{InterestExpenses}\mathbf{=}\mathbf{CouponAmount}\mathbf{-}\mathbf{\text{Premium }}\mathbf{onBondAmortized}\\ \mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{150}\mathbf{-}\mathbf{\$}\mathbf{480}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{670}\end{array}$