On January 1, Dale Company issued $500,000, 8%, 5-year bonds at face value. Inte

Question

On January 1, Dale Company issued $500,000, 8%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Prepare journal entries to record the following events. The issuance of the bonds. The payment of interest on July 1. assuming no previous accrual of interest. The accrual of interest on December 31. Upton Corporation reports the following amounts in their 2014 financial statements: Compute the December 31, 2014, balance in stockholders' equity. Compute the debt to assets ratio at December 31, 2014. Compute limes interest earned for 2014.

Explanation / Answer

1.

Date

Account title and explanation

Debit

Credit

(a)

January 01

Cash

$ 500,000.00

Bonds payable

$ 500,000.00

(b)

July 01

Interest expense

$ 20,000.00

Cash

$ 20,000.00

($500,000 * 8% * 1/2)

(c)

December 31

Interest expense

$ 20,000.00

Interest payable

$ 20,000.00

($500,000 * 8% * 1/2)

2.

(a)

Stockholder’s equity = Total assets - Total liabilities = $1,000,000 - $540,000 = $460,000

(b)

Debt to assets ratio = Total liabilities / Total assets = $540,000/$1,000,000 = 0.54 = 54%

(c)

Time interest earned = Earnings before interest and taxes (EBIT) / Interest expense

EBIT = Net income + Interest expense + income tax expense = $130,000 + $100,000 + $10,000 = $240,000

Times interest earned = $240,000 / $10,000 = 24 times

Date

Account title and explanation

Debit

Credit

(a)

January 01

Cash

$ 500,000.00

Bonds payable

$ 500,000.00

(b)

July 01

Interest expense

$ 20,000.00

Cash

$ 20,000.00

($500,000 * 8% * 1/2)

(c)

December 31

Interest expense

$ 20,000.00

Interest payable

$ 20,000.00

($500,000 * 8% * 1/2)

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