Understanding Bonds Payable: Amortization & Journal Entries Guide
School
University of Mindanao - Main Campus (Matina, Davao City)**We aren't endorsed by this school
Course
ACCOUNTING 123
Subject
Accounting
Date
Dec 12, 2024
Pages
7
Uploaded by DrMouseMaster1221
Bonds payable AKAccounting (University of Mindanao)Scan to open on StudocuStudocu is not sponsored or endorsed by any college or universityBonds payable AKAccounting (University of Mindanao)Scan to open on StudocuStudocu is not sponsored or endorsed by any college or universityDownloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260
PROBLEM 1 On January 1, 2017, Lacida company issued 7% long term bonds with face amount of 1,000,000 due January 1, 2025. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest of 6%. Assume the bonds were issued on July 1, 2017 for 1,062,809. Prepare the table of amortization using the effective interest amortization method and encircle the amount of recorded interest for the 6 months ended December 31, 2017, in the amount of _________. Answer: Table of amortization Interest Paid Interest Exp. Amortization Carrying Amount 7/1/17 1,062,809 12/31/17 35,000 31,8843,116 1,059,693 7/1/18 35,000 31,791 3,209 1,056,484 12/31/18 35,000 31,695 3,305 1,053,179 PROBLEM 2 On Jan. 1, 2007, Cobb company issued ten-year bonds with a face amount of 7,500,000 and a stated interest rate of 8% payable annually on Jan. 1. The bonds were priced to yield 10%. Present value factors are as follows:Present value of 1 for 10 periods at 10% 0.3855 Present value of an ordinary annuity of 1 for 10 periods at 10% 6.145 Required: Compute for the issue price of the bonds payable and the gain or loss on extinguishment of the bonds assuming that the bonds is prematurely retired at 98 excluding accrued interest on April 1, of year 5. Q1 Compute for the total issue price of the bonds ____________ Answer: 0.3855 * 7,500,000 = 2,891,250 6.145* 7500,000 * .08 = 3,687,000 Total PV 6,578,250 1/1/2007 6,578,250 12/31/2007 600,000 657,825 57,825 6,636,075 12/31/2008 600,000 663,608 63,608 6,699,683 12/31/2009 600,000 669,968 69,968 6,769,651 12/31/2010 600,000 676,965 76,965 6,846,616 4/1/2011 150,000 171,165 21,165 6,867,781 Q2 Prepare the amortization table until 5thyear. Q3 Prepare the entries for 3 years. 1/1/year 1 Cash 6,578,250 Disc. On B/P 921,750 Bonds payable 7,500,000 (7,500,000- 6,578,250) 12/31/year 1 Interest expense 657,825 Cash 600,000 Disc. On B/P 57,825 Downloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260
12/31/year 2 Interest expense 663,608 Cash 600,000 Disc. On B/P 63,608 12/31/year 3 Interest expense 669,968 Cash 600,000 Disc. On N/P 69,968 Year 5 upon premature retirement on April 1 Update amortization Interest expense 21,165 Disc. On B/P 21,165 B/P 7,500,000 Interest expense 150,000 Loss on retirement 482,219 Cash 7,500,000 Disc. On B/P 632,219 7500,000*.98+150,000=7,500,000 Accrued interest 7,500000*.08*3/12 =150,000 7,350,000-6,867,781 = 482,219 Problem 3On Jan. 1, 2007, Manila company issued 5-year bonds with face value of 4,000,000 at 110. The company paid bond issue cost of 64,000 on same date. The stated interest rate on bonds is 8% payable annually every Dec. 31. The bonds are issued to yield 6% per annum. Manila company uses the effective interest method of amortization. Required: a. Prepare the table of amortization 4,000,000*1.10=4,400,000-64,000=4,336,000 Answer: 1/1/2007 4,336,000 12/31 320,000 260,160 59,840 4,276,160 12/31 320,000 256,570 63,430 4,212,730 12/31 320,000 252,764 67,236 4,145,494 12/31 320,000 248,730 71,270 4,074,224 12/31 320,000 245,776 74,224 4,000,000 b. Prepare the journal entries from issuance until the end of 3rdyear. Answer: 1/1/2007 Cash 4,336,000 Bonds payable 4,000,000 Premium on B/P 336,000 Downloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260
12/31/year 1 Interest expense 260,160 Premium on B/P 59,840 Cash 320,000 12/31/year 2 Interest expense 256,570 Premium on B/P 63,430 Cash 320,000 12/31/year Interest expense 252,764 Premium on B/P 67,236 Cash 320,000 c. Answer the following questions: Q1. How much is the cash received upon issuance? 4,336,000 Q2. What is the carrying amount of the bonds at the end of 2ndyear? 4,212,730Q3. How much is the interest expense to be reported in the Income statement for the 3rdyear? 252,764Problem 4 On December 31, 2019, Famous Company sold a 12% serial bond issue with face amount of 5,600,000 for 5,936,000. The bonds mature in the amount of 800,000 on December 31 of each year beginning December 31, 2020 and interest is payable annually. On December 31, 2021, the entity retired 800,000 of bonds due on that date and in addition purchased at 105 and retired bonds with face amount of 800,000 which were due on December 31, 2023. Required: a. Prepare the original table of amortization. Answer: 12/31/2019 12/31/2020 5,600,000 84,000 12/31/2021 4,800,000 72,000 12/31/2022 4,000,000 60,000 12/31/2023 3,200,000 48,000 12/31/2024 2,400,000 36,000 12/31/2025 1,600,000 24,000 12/31/2026 800,000 12,000 22,400,000 336,000 b. Prepare the revised table of amortization 336,000/22400,000= .015 * 800,000=12,000 * 2= 24,000 12/31/2019 12/31/2020 5,600,000 84,000 12/31/2021 4,800,000 72,000 12/31/2022 4,000,000 60,000 –12,000 = 48,000 12/31/2023 3,200,000 48,000 –12,000 = 36,000 Downloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260
12/31/2024 2,400,000 36,000 36,000 12/31/2025 1,600,000 24,000 24,000 12/31/2026 800,000 12,000 12,000 22,400,000 336,000 c. Prepare the entries until the end of year 4. Answer: Cash 5,936,000 Bonds payable 5,600,000 Premium on B/P 336,000 12/31/2020 Interest expense 5,600,000*.12 672,000 Cash 672,000 Premium on B/P 84,000 Interest expense 84,000 B/P 800,000 Cash 800,000 12/31/2021 Interest expense 4,800,000 * .12 576,000 Cash 576,000 Premium on B/P 72,000 Interest expense 72,000 B/P 800,000 Cash 800,000 For the prematurely retired: B/P 800,000 Premium on B/P 24,000 Loss on retirement 16,000 Downloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260
Cash 800,000 *1.05 840,000 840,000-824,000= 16,000 In a Nutshell Problem 1 (Adapted) On January 1, 2019, Rustom Company received 4,308,000 for a 4,000,000 face amount 12% bonds, a price that yields 10%. The bonds pay interest semiannually on June 30 and December 31. The entity elected the fair value option. On December 31, 2019, the fair value of the bond is determine to be 4,100,000 based on market and interest factors. Q1 What is the amount of interest expense to be reported for 2019? Answer Interest expense 480,000 Q2 What is the gain or loss that should be recognized in 2019 to report the bond at fair value? 4,308,000-4,100,000=208,000 B/P 208,000 Gain from change in FV 208,000 Q3 What is the carrying amount of the bonds payable on December 31, 2019? 4,100,000 Q4 Prepare Journal entries Answer: Cash 4,308,000 B/P 4,308,000 Interest expense 240,000 Cash 240,000 Interest expense 240,000 Cash 240,000 B/P 208,000 Gain from change in FV 208,000 Q5 Had the company elected the “Amortized Cost” of recording bonds, what will be your answers to Q1 to Q4. 4,308,000*.10*6/12= 215,400 –240,000= 24,600- 4308,000= 4283,400*.10*6/12= 214,170 –240,000=25,830 429,570 interest expense Q2 = zero Q3 = 4,283,400- 25,830= 4,257,570 Q4 Cash 4,308,000 Downloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260
B/P 4,000,000 Premium on B/P 308,000 Interest expense 215,400 Premium on B/P 24,600 Cash 240,000 Interest expense 214,170 Premium on B/P 25,830 Cash 240,000 Downloaded by Devy Peñaredondo (kerot032679@gmail.com)lOMoARcPSD|50371260