P10-Special The XYZ Co. sold $3,000,000, 8%, 10 year bonds on January 1, 2018. T
ID: 2516344 • Letter: P
Question
P10-Special
The XYZ Co. sold $3,000,000, 8%, 10 year bonds on January 1, 2018. The bonds were dated January 1, 2018, and pay interest on January 1. The company uses the effective interest method to amortize bond premiums and discounts. Financial statements are prepared annually.
Instructions
a) Prepare the journal entries to record the issuance of the bonds assuming they are sold at:
(1) 103 (i.e. 103% of face) due to the market interest rate of 7%
(2) 98 (i.e. 98% of face) due to the market interest rate of 8.5%
b) Prepare amortization tables for both assumed sales for the first three interest payments.
c) Prepare the journal entries to record interest expense for 2018 under both of the bond issuances assumed in part (a).
d) Show the long-term liabilities balance sheet presentation for both of the bond issuances assumed in part (a) at December 31, 2018
Explanation / Answer
Solution:
First of all we solve all the requirements assuming bonds are sold at 103% of face due to the market interest rate 7% and then all the requirements assuming 98% of face and market interest rate 8.5%
Assuming bonds are sold at 103 (i.e. 103% of face) due to the market interest rate of 7%
Issue Price of the bonds = Face value $3,000,000 x 103% = $3,090,000
Face Value of the bonds = $3,000,000
Issue price is higher than face value, it means bonds are issued at premium.
Premium on Bonds Payable = $3,090,000 – 3,000,000 = $90,000
Part a – entry to record issuance of the bonds
Date
General Journal
Debit
Credit
Jan.1, 2018
Cash (Issue price)
$3,090,000
Bonds Payable (Face Value)
$3,000,000
Premium on Bonds Payable (Bal. fig)
$90,000
Part b -- amortization tables for for the first three interest payments at market interest rate 7%
Schedule of Amortization of Bond PREMIUM (Effective Rate Method)
Payment intervals
Date
Cash Paid (Face Value of the Bonds $3,000,000 x Coupon Rate 8%)
Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 7%)
Premium Amortized (Cash Paid - Interest Expense)
Premium on Bonds Payable (Unamortized Portion B/S)
Par Value of Bonds Payable
Carrying Value of the bonds at the end of period (Par Value + Balance of Unamortized Bond Premium)
0
Jan.1, 2018
$90,000
$3,000,000
$3,090,000
1
Dec.31, 2018
$240,000
$216,300
$23,700
$66,300
$3,000,000
$3,066,300
2
Dec.31, 2019
$240,000
$214,641
$25,359
$40,941
$3,000,000
$3,040,941
3
Dec.31, 2020
$240,000
$212,866
$27,134
$13,807
$3,000,000
$3,013,807
Part c -- entries to record interest expense for 2018 at market interest rate 7%
Date
General Journal
Debit
Credit
Dec.31, 2018
Interest Expense
$216,300
Premium on Bonds Payable (Bal. fig)
$23,700
Interest Payable or Cash
(Face Value $3,000,000 * Coupon Rate 8%)
$240,000
Dec.31, 2019
Interest Expense
$214,641
Premium on Bonds Payable (Bal. fig)
$25,359
Interest Payable or Cash
(Face Value $3,000,000 * Coupon Rate 8%)
$240,000
Dec.31, 2020
Interest Expense
$212,866
Premium on Bonds Payable (Bal. fig)
$27,134
Interest Payable or Cash
(Face Value $3,000,000 * Coupon Rate 8%)
$240,000
Part d -- long-term liabilities balance sheet presentation
Balance Sheet (partial)
Long Term Borrowings:
Bonds Payable (face Value)
$3,000,000
Add: Premium on Bonds Payable
$66,300
Carrying Value of Bonds Payable
$3,066,300
Assuming bonds are sold at 98 (i.e. 98% of face) due to the market interest rate of 8.5%
Issue Price of the bonds = Face value $3,000,000 x 98% = $2,940,000
Face Value of the bonds = $3,000,000
Issue price is less than face value, it means bonds are issued at discount
Discount on Bonds Payable = 3,000,000 – 2,940,000 = $60,000
Part a – entry to record issuance of the bonds
Date
General Journal
Debit
Credit
Jan.1, 2018
Cash (Issue price)
$2,940,000
Discount on Bonds Payable (Bal. fig)
$60,000
Bonds Payable (Face Value)
$3,000,000
Part b -- amortization tables for for the first three interest payments at market interest rate 8.5%
Schedule of Amortization of Bond DISCOUNT (Effective Rate Method)
Payment intervals
Date
Cash Paid (Face Value of the Bonds $3,000,000 x Coupon Rate 8%)
Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 8.5%)
Discount Amortized (Interest Expense - Cash Paid)
Discount on Bonds Payable (Unamortized Portion B/S)
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Jan.1, 2018
$60,000
$3,000,000
$2,940,000
1
Dec.31, 2018
$240,000
$249,900
$9,900
$50,100
$3,000,000
$2,949,900
2
Dec.31, 2019
$240,000
$250,742
$10,742
$39,358
$3,000,000
$2,960,642
3
Dec.31, 2020
$240,000
$251,655
$11,655
$27,704
$3,000,000
$2,972,296
Part c -- entries to record interest expense for 2018 at market interest rate 7%
Date
General Journal
Debit
Credit
Dec.31, 2018
Interest Expense
$249,900
Discount on Bonds Payable (Bal. fig)
$9,900
Interest Payable or Cash
(Face Value $3,000,000 * Coupon Rate 8%)
$240,000
Dec.31, 2019
Interest Expense
$250,742
Discount on Bonds Payable (Bal. fig)
$10,742
Interest Payable or Cash
(Face Value $3,000,000 * Coupon Rate 8%)
$240,000
Dec.31, 2020
Interest Expense
$251,655
Discount on Bonds Payable (Bal. fig)
$11,655
Interest Payable or Cash
(Face Value $3,000,000 * Coupon Rate 8%)
$240,000
Part d -- long-term liabilities balance sheet presentation
Balance Sheet (partial)
Long Term Borrowings:
Bonds Payable (face Value)
$3,000,000
Less: Discount on Bonds Payable
($50,100)
Carrying Value of Bonds Payable
$2,949,900
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Date
General Journal
Debit
Credit
Jan.1, 2018
Cash (Issue price)
$3,090,000
Bonds Payable (Face Value)
$3,000,000
Premium on Bonds Payable (Bal. fig)
$90,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.