Q7SE_1 - Horngren'S Financial And Managerial Accounting

Question

S12-7 Journalizing bond transactions

Owen Company issued a $110,000, 11%, the 10-year bond payable at 94 on January 1, 2018. Interest is paid semiannually on January 1 and July 1.

Requirements

1. Journalize the issuance of the bond payable on January 1, 2018.

2. Journalize the payment of semiannual interest and amortization of the bond discount or premium on July 1, 2018.

Step-by-Step Solution

Answer

1. The cash account and discount on bond are  debited with $103,400 and $6,600. The bonds payable is credited with $110,000.
2. Interest expense and discount on bond are debited by $6,050 and $330. The cash account credited by $6,380.

Step 1: Entry for the issue of bond

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$103,400
	Discount on bond	$6,600
	11% Bonds Payable		$110,000
	(Being Entry of the issue of bonds)

Step 2: Calculation of cash received on issue of bond and discount on bond:

$\begin{array}{c}\mathrm{Issue} \mathrm{Price}=\mathrm{Par} \mathrm{Value}\times \frac{\mathrm{\$}94}{100}\\ =\mathrm{\$}110,000\times \frac{\mathrm{\$}94}{100}\\ =\mathrm{\$}103,400\end{array}$

$\begin{array}{c}\mathrm{Discount} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}=\mathrm{Par} \mathrm{Value}-\mathrm{Issue} \mathrm{Price}\\ =\mathrm{\$}110,000-\mathrm{\$}103,400\\ =\mathrm{\$}6,600\end{array}$

Step 3: Journal entry for the interest expense

Date	Particulars	Debit	Credit
July 1, 2018	Interest Expense	$6,050
	Discount on Bonds Payable	$330
	Cash		$6,380
	(To record the payment of interest)

Step 4: Calculation of interest expense:

$\begin{array}{c}\mathrm{Coupon} \mathrm{Amount}=\mathrm{Par} \mathrm{Value}\times \mathrm{Coupon} \mathrm{Rate}\times \mathrm{Time} \mathrm{Period}\\ =\mathrm{\$}110,000\times 11\mathrm{\%}\times \frac{6}{12}\\ =\mathrm{\$}6,050\end{array}$

$\begin{array}{c}\mathrm{Discount} \mathrm{Amortize}=\frac{\mathrm{Discount} \mathrm{on} \mathrm{Bonds} \mathrm{Payable}}{\text{Semi-annual Period}}\\ =\frac{\mathrm{\$}6,600}{10\times 2}\\ =\mathrm{\$}330\end{array}$

$\begin{array}{c}\mathrm{Interest} \mathrm{Expenses}=\mathrm{Discount} \mathrm{On} \mathrm{Bond} \mathrm{Amortized}+\mathrm{Coupon} \mathrm{Amount}\\ =\mathrm{\$}330+\mathrm{\$}6,050\\ =\mathrm{\$}6,380\end{array}$