Q3TI - Horngren'S Financial And Managerial Accounting

Question

Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018.

6. Journalize the issuance of the bonds payable on January 1, 2018.

7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line

amortization method) on July 1, 2018.

8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the

first semiannual interest and amortization of the bond discount or premium.

Step-by-Step Solution

Answer

6. The cash and discount on bonds payable is debited by $98,000 and $2,000.The bond payable credited by $100,000.

7.  The interest expenses debited by $2,100. The discount on bonds payable and cash is credited by $100 and $2,000.

8.  The cash debited by $106,000. The premium on bonds payable and bonds payable credited by $6,000 and $100,000.

      The interest expenses and cash is debited by $1,700 and $300. The cash is credited by $2,000.

Step 1: Journal entries when bonds are issued at a discount

Date	Particulars	Debit	Credit
2018
January 1	Cash	$98,000
	Discount on Bonds Payable	$2,000
	Bonds Payable		$100,000
	(To record the issue of the bonds at a 2% discount)
July 1	Interest Expense	$2,100
	Discount on Bonds Payable		$100
	Cash		$2,000
	(To record the payment of interest and amortization of discount)

Step 2: Calculation of cash received on issue of bond and interest expenses:

$\begin{array}{c}\mathrm{Issue} \mathrm{Price}=\mathrm{Par} \mathrm{Value}\times \frac{\mathrm{\$}98}{100}\\ =\mathrm{\$}100,000\times \frac{\mathrm{\$}98}{100}\\ =\mathrm{\$}98,000\end{array}$

$\begin{array}{c}\mathrm{Discounton} \mathrm{Bonds} \mathrm{Payable}=\mathrm{Par} \mathrm{Value}-\mathrm{Issue} \mathrm{Price}\\ =\mathrm{\$}100,000-\mathrm{\$}98,000\\ =\mathrm{\$}2,000\end{array}$

$\begin{array}{c}\mathrm{Discount} \mathrm{Amortize}=\frac{\mathrm{Discount} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}}{\text{Semi-annual Period}}\\ =\frac{\mathrm{\$}2,000}{10\times 2}\\ =\mathrm{\$}100\end{array}$

$\begin{array}{c}\mathrm{Coupon} \mathrm{Amount}=\mathrm{Par} \mathrm{Value}\times \mathrm{Coupon} \mathrm{Rate}\times \mathrm{Time} \mathrm{Period}\\ =\mathrm{\$}100,000\times 4\mathrm{\%}\times \frac{6}{12}\\ =\mathrm{\$}2,000\end{array}$

$\begin{array}{c}\mathrm{Interest} \mathrm{Expenses}=\mathrm{Discount} \mathrm{On} \mathrm{Bond} \mathrm{Amortized}+\mathrm{Coupon} \mathrm{Amount}\\ =\mathrm{\$}100+\mathrm{\$}2,000\\ =\mathrm{\$}2,100\end{array}$

Step 3: Journal entries when bonds issued at premium

Date	Particulars	Debit	Credit
2018
January 1	Cash	$106,000
	Premium on Bonds Payable		$6,000
	Bonds Payable		$100,000
	(To record the issue of the bonds at a 6% premium)
July 1	Interest Expense	$1,700
	Premium on Bonds Payable	$300
	Cash		$2,000
	(To record the payment of interest and amortization of premium)

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

$\begin{array}{c}\mathrm{Issue} \mathrm{Price}=\mathrm{Par} \mathrm{Value}\times \frac{\mathrm{\$}106}{100}\\ =\mathrm{\$}100,000\times \frac{\begin{array}{l}\mathrm{\$}10\\ \mathrm{\$}106\end{array}}{100}\\ =\mathrm{\$}106,000\end{array}$.

$\begin{array}{c}\mathrm{Premium} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}=\mathrm{Issue} \mathrm{Price}-\mathrm{Par} \mathrm{Value}\\ =\mathrm{\$}106,000-\mathrm{\$}100,000\\ =\mathrm{\$}6,000\end{array}$

$\begin{array}{c}\mathrm{Premium} \mathrm{Amortize}=\frac{\mathrm{Premium} \mathrm{on} \mathrm{Bond} \mathrm{sPayable}}{\text{Semi-annual Period}}\\ =\frac{\mathrm{\$}6,000}{10\times 2}\\ =\mathrm{\$}300\end{array}$

$\begin{array}{c}\mathrm{Interest} \mathrm{Expenses}=\mathrm{Coupon} \mathrm{Amount}-\mathrm{Premium} \mathrm{on} \mathrm{Bond} \mathrm{Amortized}\\ =\mathrm{\$}2,000-\mathrm{\$}300\\ =\mathrm{\$}1,700\end{array}$