Q40PGB - Horngren'S Financial And Managerial Accounting

Question

Analyzing, journalizing, and reporting bond transactions

Johnny’s Hamburgers issued 8%, 10-year bonds payable at 85 on December 31, 2018.

At December 31, 2020, Johnny reported the bonds payable as follows:

Long-term Liabilities:

Bonds Payable \( 300,000

Less: Discount on Bonds Payable (36,000) \) 264,000

Johnny pays semiannual interest each June 30 and December 31.

Requirements

1. Answer the following questions about Johnny’s bonds payable:

a. What is the maturity value of the bonds?

b. What is the carrying amount of the bonds at December 31, 2020?

c. What is the semiannual cash interest payment on the bonds?

d. How much interest expense should the company record each year?

2. Record the June 30, 2020, semiannual interest payment and amortization of discount.

Step-by-Step Solution

Answer

The semi-annual interest expense is $14,250.

Step 1: Maturity value of the bonds 1(a)

The maturity value of the bonds is $300,000.

Step 2: Carrying amount of the bonds 1(b)

The carrying amount of the bonds is $264,000.

Step 3: Semi-annual interest payment 1(c)

$\begin{array}{rcl}Semi-Annual Interest& =& \frac{Face Value\times Interest rate\times time preiod}{12}\\ & =& \frac{\$300,000\times 8\%\times 6}{12}\\ & =& \$12,000\end{array}$

Step 4: Interest expense record each year 1(d)

$\begin{array}{rcl}Discount on Bonds Payable& =& Par Value(1-Bonds Issued)\\ & =& \$300,000(1-0.85)\\ & =& \$45,000\end{array}$

$\begin{array}{rcl}Semi-annual Discount Amortization& =& \frac{Total Disount}{Maturity Period}\times \frac{6}{12}\\ & =& \frac{\$45,000}{10}\times \frac{6}{12}\\ & =& \$2,250\end{array}$

$\begin{array}{rcl}Total Interest Expenses& =& Coupon Amount+Discount on Bonds Payable\\ & =& \$12,000+\$2,250\\ & =& \$14,250\end{array}$

The company has to record $14,250 as an interest expense.

Step 5: Entry for the payment of interest (2)

Date	Accounts and Explanation	Debit	Credit
June 30, 2020	Interest Expense	$14,250
	Discount on Bonds Payable		$2,250
	Cash		$12,000
	(To record the payment of interest)