Franklin issued $80,000 of 10-year, 8% bonds payable on January 1. 2016. Frankli

Question

Franklin issued $80,000 of 10-year, 8% bonds payable on January 1. 2016. Franklin pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line amortization method. The company can issue its bonds payable under various conditions. Journalize Franklins issuance of the bonds and first semiannual interest payment assuming the bonds were issued at face value are not required. Journalize Franklins issuance of the bonds .and firs, semiannual interest payment assuming the bonds were issued at 94. Explanation required. Journalize Franklin's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 103. Explanations are not required. Which bond price results in the most interest expense for Franklin? Explain in detail

Explanation / Answer

1

Assuming Bonds were issued at Face Value :

Journal entry for Issuance of Bonds:

Date

Account Title And Explanations

Debit

Credit

Jan. 1, 2016

Cash

$        80,000

Bonds Payable

$        80,000

(being bonds issued at face value for cash)

Journal entry for first semiannual interest payment:

Date

Account Title And Explanations

Debit

Credit

July. 1, 2016

Interest Expense (80000*8%/2)

$          3,200

Cash

$          3,200

(being semiannual interest paid on bonds)

2

Assuming Bonds were issued at $94 (At Discount) :

Journal entry for Issuance of Bonds:

Date

Account Title And Explanations

Debit

Credit

Jan. 1, 2016

Cash (80000*94/100)

$        75,200

Discount on bonds payable (80000-75200)

$          4,800

Bonds Payable

$        80,000

(being bonds issued at discount for cash)

Journal entry for first semiannual interest payment:

Date

Account Title And Explanations

Debit

Credit

July. 1, 2016

Interest Expense (3200+240)

$          3,440

Discount on bonds payable (4800 / 20 semiannual)

$              240

Cash (80000*8%/2)

$          3,200

(being semiannual interest paid on bonds and Discount Amortized)

3

Assuming Bonds were issued at $103 (At Premium) :

Journal entry for Issuance of Bonds:

Date

Account Title And Explanations

Debit

Credit

Jan. 1, 2016

Cash (80000*103/100)

$        82,400

Premium on bonds payable (82400-80000)

$          2,400

Bonds Payable

$        80,000

(being bonds issued at premium for cash)

Journal entry for first semiannual interest payment:

Date

Account Title And Explanations

Debit

Credit

July. 1, 2016

Interest Expense (3200-120)

$          3,080

Premium on bonds payable (2400 / 20 Semiannual)

$              120

Cash (80000*8%/2)

$          3,200

(being semiannual interest paid on bonds and premium Amortized)

4

The interest expense shall be highest in case bonds are issued as discount, because amortization of discount increase the bonds interest expense

1

Assuming Bonds were issued at Face Value :

Journal entry for Issuance of Bonds:

Date

Account Title And Explanations

Debit

Credit

Jan. 1, 2016

Cash

$        80,000

Bonds Payable

$        80,000

(being bonds issued at face value for cash)

Journal entry for first semiannual interest payment:

Date

Account Title And Explanations

Debit

Credit

July. 1, 2016

Interest Expense (80000*8%/2)

$          3,200

Cash

$          3,200

(being semiannual interest paid on bonds)

2

Assuming Bonds were issued at $94 (At Discount) :

Journal entry for Issuance of Bonds:

Date

Account Title And Explanations

Debit

Credit

Jan. 1, 2016

Cash (80000*94/100)

$        75,200

Discount on bonds payable (80000-75200)

$          4,800

Bonds Payable

$        80,000

(being bonds issued at discount for cash)

Journal entry for first semiannual interest payment:

Date

Account Title And Explanations

Debit

Credit

July. 1, 2016

Interest Expense (3200+240)

$          3,440

Discount on bonds payable (4800 / 20 semiannual)

$              240

Cash (80000*8%/2)

$          3,200

(being semiannual interest paid on bonds and Discount Amortized)

3

Assuming Bonds were issued at $103 (At Premium) :

Journal entry for Issuance of Bonds:

Date

Account Title And Explanations

Debit

Credit

Jan. 1, 2016

Cash (80000*103/100)

$        82,400

Premium on bonds payable (82400-80000)

$          2,400

Bonds Payable

$        80,000

(being bonds issued at premium for cash)

Journal entry for first semiannual interest payment:

Date

Account Title And Explanations

Debit

Credit

July. 1, 2016

Interest Expense (3200-120)

$          3,080

Premium on bonds payable (2400 / 20 Semiannual)

$              120

Cash (80000*8%/2)

$          3,200

(being semiannual interest paid on bonds and premium Amortized)

4

The interest expense shall be highest in case bonds are issued as discount, because amortization of discount increase the bonds interest expense

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