Lore Corporation sold $2,000,000, 6%, 10-year bonds on January 1, 2010. The bond

Question

Lore Corporation sold $2,000,000, 6%, 10-year bonds on January 1, 2010. The bonds were dated January 1, 2010, and pay interest on January 1. Lore Corporation uses the straight-line method to amortize bond premium or discount.

Hint: Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation.

Instructions:

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2010, assuming that the bonds sold at 103.

(b) Prepare journal entries as in part (a) assuming that the bonds sold at 98.

(c) Show the balance sheet presentation for the bond issue at December 31, 2010, using (1) the 103 selling price, and then (2) the 98 selling price

Explanation / Answer

Since this is for the company issuing the bond, it will be recorded as a Bond Payable. A.) Issuance of Bond - 1/1/10 Bond is sold at 103, which means it is sold for a premium (103% of the face value). So to get the bond price, multiply the face value by 1.03. $2,000,000 x 1.03 = $2,060,000 Journal Entry: DR: Cash 2,060,000 CR: Bond Payable 2,000,000 CR: Bond Premium 60,000 B.) Issuance of Bond - 1/1/10 In this case, the bond is sold at 98, which means it has been sold at a discount (98% of the face value). So, multiply the face value by 0.98. $2,000,000 x 0.98 = $1,960,000 Journal Entry: DR: Cash 1,960,000 DR: Bond Discount 40,000 CR: Bond Payable 2,000,000 The Bond Payable amount will always be the face value of the bond. The amount of cash received will depend upon whether the bond is sold at a discount or a premium. Plugging in either a debit to a discount or a credit to a premium will make the journal entry balance. Additionally, since this is the date of issue, no amortization has occurred on the premium/discount in either case. C.) Balance Sheet Presentation, 12/31/10: At this point, one year has passed and amortization has occurred on the premium/discount: 1.) At 103: Straight-Line Amortization of the Premium: $60,000/10 years = $6,000 per year Bond Payable 2,000,000 Bond Premium 54,000 (60,000-6,000) Carrying Value of Bond 2,054,000 2.) At 98: Straight-Line Amortization of the Discount: $40,000/10 years = $4,000 per year Bond Payable 2,000,000 Bond Discount (36,000) Carrying Value of Bond 1,964,000 Premiums are amortized from up to down until they are gone; discounts are amortized from down to up until they are gone. After the full amortization of either of them, the bond's carrying value will equal its original face amount. Hope that helps. Please rate.

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