A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual
ID: 2420667 • Letter: A
Question
A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face on January 2, 2012. The issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate.
a)
Determine the effect on the accounting equation upon recording the issuance of the bonds.
b)
Determine the effect on the accounting equation upon recording the recognition of interest expense at December 31, 2012. Any premium or discount should be amortized using the effective interest rate method.
c)
Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2013.
d)
Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2013. Any premium or discount should be amortized using the effective interest rate method.
a)
Determine the effect on the accounting equation upon recording the issuance of the bonds.
b)
Determine the effect on the accounting equation upon recording the recognition of interest expense at December 31, 2012. Any premium or discount should be amortized using the effective interest rate method.
c)
Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2013.
d)
Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2013. Any premium or discount should be amortized using the effective interest rate method.
Explanation / Answer
a) The accounting entry is Debit Cash $ 19,866,397 Debit discount on bonds payable $ 133,603 Credit Bonds payable $ 20,000,000
The effect of recording this transaction is Assets (cash) increases by $19,866,397, a capital loss on discount on bonds payable of $ 133,603 is recognized( a contra account against bonds payable) , and a liability of $ 20,000,000 bonds payable increases.
b) The accounting entry should be Debit Interest expense $1,609,178 Credit discount on bonds payable $9,178 Credit Interest payable $1,600,000
Effect on the accounting equation: Increase in Liability (Bonds payable) $9,178 and Increase in Liability (interest payable) $1,600,000, Decrease in Equity (retained earnings) $ 1,609,178
c) The interest payment is recoded as Debit Interest payable $ 1,600,000 Credit Cash $ 1,600,000
Effect on the accounting equation: Decrease in asset (cash) $ 1,600,000, and decrease in liability( interest payable) $ 1,600,000
d) The recording entry is Debit interest expense $ 1,609,922, Credit discount on bonds payable $ 9,922, Credit Interest payable $ 1,600,000
Effect on the accounting equation: Equity reduces by $ 1,609,922, LIability (interest payable) increases by $ 1,600,000 and Liability(bonds payable) increases by $ 9,922.
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