Chapter 15 Bond Issued at Discount Premium Additional Problems PDF

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Chapter 15 – Bonds issued at DISCOUNT On April 30, 2017, B Corp. issues $1 million 5-year, 5% semi-annual bonds at the time when market rate of return for similar investments was 6%. Required: a). Calculate the cash price of the bond, at issuance. b). Record the issuance of the bond c). Calculate and record the first interest payment of October 31, 2017. d). Calculate and record the required adjusting entry at December31, the fiscal year end. e). Calculate and record the second interest payment of April 30, 2018.

SOLUTION a). FV $1 mil PMT

$25,000 = $1 mil x 5% x ½

N

10 = 5 years x 2 payment periods per year

I/Y

3=6x½

CPT PV - $957,349 b). Jan. 2 (Dr) Cash (Dr) Discount on Bond Payable (Cr) Bond Payable To issue 5%, 5-year bonds, yielding a 6% return.

$957,349 42,651 $1,000,000

c). Interest expense at October 31, 2017:

$957,349 × 6% (market rate) × 6/12 = $28,720

Interest payment (Cash payment) at June 2, 2016: $1,000,000 × 5% (stated rate) × 6/12 = $25,000 Amortization of Bonds Payable: $28,720 - $25,000 = $3,720 Journal entry: Oct 31 (Dr) Interest Expense

$28,720

(Cr) Cash

$25,000

(Cr) Discount on Bonds Payable

3,720

To record amortization expense of discount on Bonds Payable

d). Interest expense at Dec 31, 2017: $961,069 × 6% (market rate) x 6/12 x 2/6 = $9,611 Interest payable at Dec 31, 2017:

$1,000,000 × 5% (stated rate) × 6/12 x 2/6 = $8,333

Amortization of Bonds Payable: ($9,611 - $8,333) = $1,278 Journal entry: Dec 31 (Dr) Interest Expense

$9,611

(Cr)Interest payable (Cr) Discount on Bonds Payable

$8,333 1,278

To record year end adjusting entry on amortization expense of discount on Bonds Payable e). Journal entry: Apr 30, 2018

(Dr) Interest expense ($28,832-$9,611) (Dr) Interest payable

$19,221 8,333

(Cr) Discount on Bonds Payable ($3,832 – $1,278) (Cr) Cash To record 2nd interest payment on Bonds Payable

$2,554 25,000

Chapter 15 – Bonds issued at PREMIUM On April 1, 2017 B Corp. issues $1 million 5-year, 5% semi-annual bonds at the time when the market rate of return for similar investments was 4%. Required: a). Calculate the cash price of the bond, at issuance. b). Record the issuance of the bond c). Calculate and record the first interest payment of October 31, 2017. d). Calculate and record the required adjusting entry at December31, the fiscal year end. e). Calculate and record the second interest payment of April 30, 2018.

SOLUTION a). FV $1 mil PMT

$25,000 = $1 mil x 5% x ½

N

10 = 5 years x 2 payment periods per year

I/Y

2=4x½

CPT PV - $1,044,913 b). Journal entry: Apr 30

(Dr) Cash

$1,044,913

(Cr) Bond Payable (Cr) Premium on Bonds Payable To record issuance of bonds at premium

$1,000,000 44,913

c). Journal entry: Oct 31 (Dr) Interest expense

$20,898

(Dr) Premium on Bond Payable

4,102

(Cr) Cash

$25,000

To pay semi-annual interest (column A) and amortize the premium (column B) on bonds payable. d). Calculations: (Work with the amounts already calculated in the amortization table above) On Dec. 31: Interest payable: $25,000 × 2/6 months = $8,334 Interest expense: $20,816 × 2/6 = $6,939 Premium amortization: $4,184 × 2/6 = $1,395 Journal entry: Dec 31 (Dr) Interest expense

$6,939

(Dr) Premium on Bond Payable

1,395

(Cr) Interest payable

$8,334

e). On Apr. 30, the 2nd interest payment date: Journal entry: Apr 30

(Dr) Interest expense ($20,816-$6,939)

$13,877

(Dr) Interest payable

8,334

(Dr) Premium on Bonds Payable ($4,184-$1,395)

2,789

(Cr) Cash

$25,000...