Sunset Company issues $2,000,000 face value, 5%, 5-year bonds payable on Decembe
ID: 2482340 • Letter: S
Question
Sunset Company issues $2,000,000 face value, 5%, 5-year bonds payable on December 31, 20X1. Interest is paid semiannually each June 30 & December 31. The bonds sell at a price of 96; Sunset uses the straight-line method of amortizing bond discount/premium. 1. Record the entry made by Sunset Co. to record issuance of the bonds payable. 2. What is the carrying value of this liability on the December 31, 20X1 balance sheet? 3. Record the first semiannual payment of interest and amortization of discount/premium on the bonds at June 30, 20X2. 4. What is the carrying value of this liability at June 30, 20X2? 5. What is the carrying value of this liability at maturity? 6. Record the entry if the bonds were retired June 30 20X2 for 98. 7. Record the entry if the bonds were converted for 10,000 shares $100 par common stock on Dec. 31, 20X6 at maturity.
Explanation / Answer
Solution:
1) Issuance of the bonds on Dec 31, 20x1
Date
Account Title and Explanation
Debit
Credit
Dec 31, 20x1
Cash A/c Dr.
($2,000,000*96%)
$1,920,000
Discount on Bonds Payable
$80,000
To Bonds Payable
$2,000,000
(Being the bonds issued at discount)
2)
Carrying Value of this liability on Dec 31, 20x1 = Par Value – Discount on Bonds Payable = $2,000,000 - $80,000 = $1,920,000
3) First interest payment on June 30 assuming straight line amortization
Interest Expenses = Semi Annual Interest Payable + Amortization of Discount on Bonds Payable
Semi Annual Interest Payable = $2,000,000*5%*1/2 = $50,000
Discount on Bonds Payable = Par Value – Issue Price = $2,000,000 - $1,920,000 = $80,000
Straight line Amortization amount of Discount on Bonds Payable on each interest payment = $80,000 / 10 = $8,000
Interest Expenses = $50,000 + $8,000 = $58,000
Date
Account Title and Explanation
Debit
Credit
June 30, 20x2
Interest Expenses Dr.
$58,000
To Discount on Bonds Payable
$8,000
To Interest Payable to Bond Holders
$50,000
(being Interest expenses recorded)
On payment of Interest
June 30, 20x2
Interest Payable to Bond Holders Dr.
$50,000
To Cash A/c
$50,000
(Being interest paid)
4)
The carrying value of this liability at June 30, 20X2 = Carrying Value of the bonds as on Dec 31, 20x1 + amortization of discount on bonds payable
= $1,920,000 + $8,000
= $1,928,000
Date
Account Title and Explanation
Debit
Credit
Dec 31, 20x1
Cash A/c Dr.
($2,000,000*96%)
$1,920,000
Discount on Bonds Payable
$80,000
To Bonds Payable
$2,000,000
(Being the bonds issued at discount)
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