Problem 4. Assume that the following are independent situations recently reporte
ID: 2558268 • Letter: P
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Problem 4. Assume that the following are independent situations recently reported in the Wall Street Journal. General Electric (GE) 7% bonds (interest payable annually on January 1), maturing January 1, 2037, were issued at 111.12 on January 1, 2017 2 Boeing 7% bonds (interest payable annually on December 31), maturing January 1, 2043 were issued at 9908 on January 1, 2018. Instructions (a) Were GE and Boeing bonds issued at a premium or a discount? (b) Explain how bonds, both paying the same contractual interest rate, could be issued at different prices. (c) Prepare the journal entry to record the issue of each of these two bonds, assuming each company issued S500,000 of bonds in total. (d) Prepare the adjusting entries to record the accrued interest and the amortization of the premium on the bonds for GE, on December 31, 2017 using (1) straight-line amortization, (2) effective interest rate (assumed 55%) amortization (e) Prepare the entries to record the interest payment and the amortization of the discount on mortization, (2) effective interest rate (assumed 7.5%) amortizationExplanation / Answer
NOTE: Chegg guidelines requires us to answer the first 4 questions only.
(a)
GE bonds were issued at a premium
Boeing bonds were issued at a discount.
(b) Bonds paying same contractual interest rate could be issued at a different prices due to the issuing prices of the bonds. The bonds issued by GE at a premium provided actual interest rate lower than that of the bonds issued by Boeing, as the bonds issued by Boeing are at a discount.
(c)
Books of GE
Bank A/c Dr 555,600
To 7% Bonds a/c 500,000
To premium on issue a/c 55,600
Books of Boeing
Bank A/c Dr 495,400
Discount on issue A/c Dr 4,600
To 7% Bonds A/c 500,000
(d)
Books of GE
Interest A/c Dr 32,220
Premium on Issue A/c Dr 2,780
To Interest Payable a/c 35,000
Premium to be written off = 55,600/20 = 2,780
Books of Boeing
Interest A/c Dr 35,184
To Bank A/c 35,000
To discount on issue 184
Discount to be written of = 4,600/25 = 184
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