Chapter 10, Problem 8PA

1.

To determine

Prepare a bond amortization schedule.

Explanation of Solution

Amortization Schedule: An amortization schedule is a table that shows the details of each loan payment allocated between the principal amount and the overdue interest along with the beginning and ending balance of the loan. From the amortization schedule of the loan, the periodical interest expense, total interest expense and total payment made are known.

Prepare a bond amortization schedule as below:

Bond amortization schedule – Simplified Effective- Interest Amortization Method
Period	Bonds Payable, Net (A)	Interest Expense (Bonds payable, net x 4%) (B)	Cash Paid (Face value x 3%) (C)	Interest Added to Bonds Payable $\left(D\right)=\left(B\right)–(C)$	Bonds Payable, Net $\left(E\right)=\left(A\right)+(D)$
01/01/2018-12/31/2018	$583,352	$23,334	$18,000	$5,334	$588,686
01/01/2019-12/31/2019	$588,686	$23,547	$18,000	$5,547	$594,233
01/01/2020-12/31/2020	$594,233	$23,767 (rounded)	$18,000	$5,767	$600,000

Table (1)

2.

To determine

Prepare journal entry to record the issuance of the bonds on January 1, 2018.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Prepare journal entry for cash proceeds from the issuance of the bonds on January 1, 2018.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 1, 2018	Cash		583,352
	Bonds Payable, Net			583,352
	(To record issuance of bonds payable)

Table (2)

• Cash is an asset and it increases the value of assets. So, debit it by $583,352.
• Bonds payable, net is a liability and it is increases the value of liabilities. So, credit it by $583,352.

3.

To determine

Prepare journal entry to record the interest payment on December 31, 2018 and 2019.

Explanation of Solution

Prepare journal entry for payment of interest on bonds on December 31, 2018.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2018	Interest Expense (2)		23,334
	Bonds Payable, net (3)			5,334
	Cash (1)			18,000
	(To record the payment of interest on bonds)

Table (3)

• Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $23,334.
• Bonds payable, net is a liability and it decreases the value of liabilities. So, credit it by $5,334.
• Cash is an asset and it decreases the value of assets. So, credit it by $18,000.

Working note (1):

Calculate the cash interest payment.

$\begin{array}{c}\text{Cash Interest Payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times \frac{3}{100}\times 1\text{ year}\\ =\$18,000\end{array}$

Working note (2):

Calculate the interest expense.

$\begin{array}{c}\text{Interest expense}=\text{Carrying amount }\times \text{Market interest}\times \text{Time}\\ =\$583,352\times \frac{4}{100}\times 1\\ =\$23,334\end{array}$

Working note (3):

Calculate the bonds payable, net.

$\begin{array}{c}\text{Bonds payable, net}=\text{Interest Expense}–\text{Cash interest payment }\\ =\$23,334-\$18,000\\ =\$5,334\end{array}$

Prepare journal entry for payment of interest on bonds December 31, 2019.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2019	Interest Expense (5)		23,547
	Bonds Payable, net (6)			5,547
	Cash (4)			18,000
	(To record the payment of interest on bonds)

Table (4)

• Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by $23,547.
• Bonds payable, net is a liability and it decreases the value of liabilities. So, credit it by $5,547.
• Cash is an asset and it decreases the value of assets. So, credit it by $18,000.

Working note (4):

Calculate the cash interest payment.

$\begin{array}{c}\text{Cash Interest Payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times \frac{3}{100}\times 1\\ =\$18,000\end{array}$

Working note (5):

Calculate the interest expense.

$\begin{array}{c}\text{Interest expense}=\text{Carrying amount }\times \text{Market interest}\times \text{Time}\\ =\left(\$583,352+\$5,334\right)\times \frac{4}{100}\times 1\\ =\$23,547\end{array}$

Working note (6):

Calculate the bonds payable, net.

$\begin{array}{c}\text{Bonds payable, net}=\text{Interest Expense}–\text{Cash interest payment }\\ =\$23,547(4)-\$18,000(5)\\ =\$5,547\end{array}$

4.

To determine

Prepare journal entry to record the interest and face value payment on December 31, 2020.

Explanation of Solution

Prepare journal entry for payment of interest and face value.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2020	Interest Expense (8)		23,767
	Bonds Payable, net (9)		594,233
	Cash (7)			618,000
	(To record payment of interest and face value)

Table (5)

• Interest expense is a component of stockholder’s equity and it decreases the equity value. So, debit it by 23,767.
• Bonds payable, net is a liability and it decreases the value of liabilities. So, debit it by $594,233.
• Cash is an asset and it decreases the value of assets. So, credit it by $618,000.

Working note (7):

Calculate the cash interest payment.

$\begin{array}{c}\text{Cash Interest Payment}=\left(\begin{array}{l}\text{Face value}\times \text{Stated interest rate}\\ \times \text{Interest time period}\end{array}\right)\\ =\$600,000\times \frac{3}{100}\times 1\\ =\$18,000\end{array}$

Working note (8):

Calculate the interest expense.

$\begin{array}{c}\text{Interest expense}=\text{Carrying amount }\times \text{Market interest}\times \text{Time}\\ =\left(\$583,352+\$5,334+\$5,547\right)\times \frac{4}{100}\times 1\\ =\$23,767\end{array}$

Working note (9):

Calculate the bonds payable, net.

$\begin{array}{c}\text{Bonds payable, net}=\left(\text{Cash interest payment +}\text{Face value }\right)-\text{Interest Expense}\\ =\left(\$18,000(7)+\$600,000\right)-\$23,767\text{ (8)}\\ =\$618,000-\$23,767\\ =\$594,233\end{array}$

5.

To determine

Prepare journal entry to record the bond retirement on January 1, 2020.

Explanation of Solution

Retirement of Bonds: The process of repaying the sale amount of bonds to bondholders at the time of maturity or before the maturity period is called as retirement of bonds. It is otherwise called as redemption of bonds.

Prepare Journal entry to record the bond retirement on January 1, 2020.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 1, 2020	Bonds Payable, net		594,233
	Loss on Retirement of Bonds (10)		11,767
	Cash			606,000
	(To record the retirement of the bonds)

Table (6)

• Bonds payable, net is a liability and it decreases the value of liabilities. So, debit it by $594,233.
• Loss on retirement of bonds is a component of stockholders’ equity and it decreases the value of stockholder’s equity. So, debit it by $11,767.
• Cash is an asset and it decreases the value of assets. So, credit it by $606,000

Working note (10):

Compute the loss on the redemption of the bonds payable.

$\begin{array}{c}\begin{array}{l}\text{Loss on redemption}\\ \text{ of bonds payable}\end{array}\}=\left(\begin{array}{l}\text{Cash paid to retire }\\ \text{the bonds}\end{array}\right)-\text{Bonds payable, net}\\ =\left(\$600,000\times \frac{101}{100}\right)-\$594,233\\ =\$606,000-\$594,233\\ =\$11,767\end{array}$