INSTRUCTIONS: This assignment will require that you prepare nearly EVERY journal

Question

INSTRUCTIONS: This assignment will require that you prepare nearly EVERY journal entry that is noted on the “Journal Entries without Dollar Amounts” handout. You MUST follow directions strictly as given below for each of the three scenarios; Par, a Premium, and a Discount.

The Critical Thinking Corporation
[General Information]

The Critical Thinking Corporation (hereafter “CT Corp”) has decided to finance the construction of its new division by issuing a $970,000 bond issue. The bonds are issued on January 1, 2017 and will mature in five years on January 1, 2022. The contract rate is 12% and interest is paid semi-annually.   The company implements the straight-line method to amortize any discount on bonds or premium on bonds.

The Vice-President of Finance desires to look ahead at the THREE (3) potential conditions (scenarios) under which the bond could be issued. The conditions (scenarios) are [1] issued at par, [2] issued at a discount, and [3] issued at a premium.  

For each condition (scenario), you have been asked to provide selected journal entries (JEs) that would be recorded on the books of CT Corp.   Note: If amortization is required for a condition (scenario), you MUST provide the ENTIRE amortization table to support your journal entries.

BE SURE TO GIVE STRICT ATTENTION TO DATES.

Read and understand EVERYTHING in this assignment.   Use your textbook as a resource for problem setup and table formatting.   

Scenario ONE: Bonds issued at Par

Part One: Provide JEs for the transactions below:

1/1/17Issuance of the bonds at Par.

7/1/17First interest payment, and amortization (if any).

12/31/17Accrual of interest at the end of the fiscal year, and amortization (if
any).

1/1/18 Second bond interest payment.

Year 2020

1/1/20Payment of interest.  

7/1/20Payment of interest, and amortization (if any).

12/31/20Accrual of interest at the end of the fiscal year, and amortization (if
any).

Year 2022

1/1/22Payment of interest.

1/1/22The bonds are redeemed according to the contract.

Part Two: Illustrate how the bond would be reported on the balance sheet of CT Corp on the year-end dates below. Illustrate in detail.

a. 12/31/18

b. 12/31/20

Scenario TWO: Bonds issued at a discount

Part One: Provide JEs for the transactions below:

1/1/17Issuance of the bonds at 95.

7/1/17First interest payment, and amortization (if any).

12/31/17Accrual of interest at the end of the fiscal year, and amortization (if
any).

1/1/18 Second bond interest payment.

Year 2020

1/1/20Payment of interest.

7/1/20Payment of interest, and amortization (if any).

12/31/20Accrual of interest at the end of the fiscal year, and amortization (if
any).

Year 2022

1/1/21Payment of interest.

1/1/21The bonds are redeemed a year early at 103.

Part Two: Illustrate how the bond would be reported on the balance sheet of CT Corp on the year-end dates below. Illustrate in detail.

a. 12/31/18

b. 12/31/20

Scenario THREE: Bonds issued at a Premium

Part One: Provide JEs for the transactions below:

1/1/17Issuance of the bonds at 105.

7/1/17First interest payment, and amortization (if any).

12/31/17Accrual of interest at the end of the fiscal year, and amortization (if
any).

1/1/18 Second bond interest payment.

Year 2020

1/1/20Payment of interest.  

7/1/20Payment of interest, and amortization (if any).

12/31/20Accrual of interest at the end of the fiscal year, and amortization (if
any).

Year 2022

1/1/21Payment of interest.

1/1/21The bonds are redeemed a year early at 93.

Part Two: Illustrate how the bond would be reported on the balance sheet of CT Corp on the following year-end dates:

c. 12/31/18

d. 12/31/20

Explanation / Answer

Answer. Scenario 1. Part.1 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1/1/17 Cash                                                         Dr. 970000 To Bonds - 12% 970000 (issue of bonds at par) 7/1/17 Interest Exp. - Bonds                         Dr. 58200    To Cash 58200 (Interest on Bonds paid - half Yearly - $970000 X 12% X 6/12) 12/31/17 Interest Exp. - Bonds                         Dr. 58200    To Interest Payable - Bonds 58200 (Interest on Bonds - half Yearly - Accrue - $970000 X 12% X 6/12) 1/1/18 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 1/1/20 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 7/1/20 Interest Exp. - Bonds                         Dr. 58200    To Cash 58200 (Interest on Bonds paid - half Yearly - $970000 X 12% X 6/12) 12/31/20 Interest Exp. - Bonds                         Dr. 58200    To Interest Payable - Bonds 58200 (Interest on Bonds - half Yearly - Accrue - $970000 X 12% X 6/12) 1/1/22 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 1/1/22 Bonds-12%                                         Dr. 970000    To Cash 970000 (Bonds are redeemed) Part Two Value of Bond in Balance Sheet of CT Corp. 12/31/18 Bonds - 12% 970000 12/31/20 Bonds - 12% 970000 Answer. Scenario 2. Part.1 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1/1/17 Cash                                                         Dr. 921500 Discount on Issue of Bonds           Dr. 48500 To Bonds - 12% 970000 (issue of bonds at discount) 7/1/17 Interest Exp. - Bonds                         Dr. 53350 Discount on Issue of Bonds           Dr. 4850    To Cash 58200 (Interest on Bonds paid and discount amortized - half Yearly ) 12/31/17 Interest Exp. - Bonds                         Dr. 53350 Discount on Issue of Bonds           Dr. 4850    To Interest Payable - Bonds 58200 (Interest on Bonds - half Yearly - Accrue and discount amortized) 1/1/18 Interst Payable - Bonds                  Dr. 53350    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 1/1/20 Interst Payable - Bonds                  Dr. 53350    To Cash 53350 (Interest Accrue on Bonds paid - half Yearly) 7/1/20 Interest Exp. - Bonds                         Dr. 53350 Discount on Issue of Bonds           Dr. 4850    To Interest Payable - Bonds 58200 (Interest on Bonds - half Yearly - Accrue and discount amortized) 12/31/20 Interest Exp. - Bonds                         Dr. 53350 Discount on Issue of Bonds           Dr. 4850    To Interest Payable - Bonds 58200 (Interest on Bonds - half Yearly - Accrue and discount amortized) 1/1/21 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 1/1/21 Bonds-12%                                         Dr. $960,300 Discount on Issue of Bonds        Dr. $9,700 Premium on red. of Bonds        Dr.                29,100        To Cash 999100 (Bonds are redeemed at premium) Part 2. Value of Bond in Balance Sheet of CT Corp. 12/31/18 Bonds Payable -12% $940,900 12/31/20 Bonds Payable -12% $960,300 Answer. Scenario 3. Part.1 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1/1/17 Cash                                                         Dr.          1,018,500 To Bonds - 12%          970,000 To premiun on Issue of Bonds 48500 (issue of bonds at discount) 7/1/17 Interest Exp. - Bonds                         Dr. 63050    To Cash 58200    To Premiun on Issue of Bonds         4850 (Interest on Bonds paid and premium amortized - half Yearly ) 12/31/17 Interest Exp. - Bonds                         Dr. 63050    To Interest Payable - Bonds 58200    To Premiun on Issue of Bonds         4850 (Interest on Bonds - half Yearly - Accrue and premium amortized) 1/1/18 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 1/1/20 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 7/1/20 Interest Exp. - Bonds                         Dr. 58200    To Interest Payable - Bonds 58200    To Premiun on Issue of Bonds         4850 (Interest on Bonds - half Yearly - Accrue and premium amortized) 12/31/20 Interest Exp. - Bonds                         Dr. 63050    To Cash 58200    To Premiun on Issue of Bonds         4850 (Interest on Bonds paid and premium amortized - half Yearly ) 1/1/21 Interst Payable - Bonds                  Dr. 58200    To Cash 58200 (Interest Accrue on Bonds paid - half Yearly) 1/1/21 Bonds-12%                                         Dr.              979,700        To Cash 902100        To Premiun on Issue of Bonds         9700        To Discount on red of Bonds $67,900 (Bonds are redeemed at discount) Part 2. Value of Bond in Balance Sheet of CT Corp. Value of Bond in Balance Sheet of CT Corp. 12/31/18 Bonds Payable -12%          999,100 12/31/20 Bonds Payable -12%          979,700 Amortization Table Semiannual Interest Period -End Cash Interest Paid Bond Interest expense Discount Amortization Unamortized Discount Carrying Value 01/01/2017 0 0 0 $48,500 $921,500 06/30/2017 58200 53350 $4,850 $43,650 $926,350 12/31/2017 58200 53350 $4,850 $38,800 $931,200 06/30/2018 58200 53350 $4,850 $33,950 $936,050 12/31/2018 58200 53350 $4,850 $29,100 $940,900 06/30/2019 58200 53350 $4,850 $24,250 $945,750 12/31/2019 58200 53350 $4,850 $19,400 $950,600 06/30/2020 58200 53350 $4,850 $14,550 $955,450 12/31/2020 58200 53350 $4,850 $9,700 $960,300 Bond Premium Amortization Table Date Interest payment Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value A B C = A-B 01/01/2017               48,500    1,018,500 06/30/2017                 58,200                     63,050                       4,850               43,650    1,013,650 12/31/2017                 58,200                     63,050                       4,850               38,800    1,008,800 06/30/2018                 58,200                     63,050                       4,850               33,950    1,003,950 12/31/2018                 58,200                     63,050                       4,850               29,100       999,100 06/30/2019                 58,200                     63,050                       4,850               24,250       994,250 12/31/2019                 58,200                     63,050                       4,850               19,400       989,400 06/30/2020                 58,200                     63,050                       4,850               14,550       984,550 12/31/2020                 58,200                     63,050                       4,850                 9,700       979,700

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