In: Accounting
Mastery Problem: Liabilities: Bonds Payable
SpringFit Corporation
You are an accounting intern working for SpringFit Corporation. You have recently been assigned to help one of the accountants who is doing an internal audit of the business. You will be assisting with a review of the payables issued by SpringFit Corporation. Your first task is to review the previous year’s journal entries, shown as follows:
Journal Entries, Year 1
Journal
DateDescriptionDebitCredit
Jan. 1Cash1,004,720
Premium on Bonds Payable58,720
Bonds Payable946,000
Jun. 30Interest Expense18,349
Premium on Bonds Payable2,936
Cash21,285
Jul. 1Cash1,729,164
Discount on Bonds Payable70,836
Bonds Payable1,800,000
Dec. 31Interest Expense18,349
Premium on Bonds Payable2,936
Cash21,285
31Interest Expense37,403
Discount on Bonds Payable5,903
Cash31,500
31Retained Earnings74,101
Interest Expense74,101
Bonds Payable
Review the journal entries on the SpringFit Corporation panel, then answer the following questions.
1. Assuming that no bonds had been issued prior to Year 1, how many different bonds appear in the journal entries for this year?
2. Which entry shows bonds issued at a contract rate lower than the market rate of interest? Choose the date.
3. How much interest was paid during the year on the bonds in question (2)?
$
4. What is the carrying amount of the bonds in question (2) at the end of the year?
$
5. Which entry shows bonds that sold for more than their face amount? Choose the date.
6. How much interest was paid during the year on the bonds in question (5)?
$
7. Assuming that straight-line amortization is used for the bonds in question (5), what is the bond life?
8. What is the carrying value of the bonds in question (5) at the end of the year?
$
Journal Entries, Year 2
You have been asked to continue your work on the SpringFit Corporation audit. The journal entries for the current year are shown as follows:
Journal
DateDescriptionDebitCredit
Jun. 30Interest Expense18,349
Premium on Bonds Payable2,936
Cash21,285
30Interest Expense37,403
Discount on Bonds Payable5,903
Cash31,500
30Bonds Payable1,800,000
Gain on Redemption of Bonds41,000
Discount on Bonds Payable59,030
Cash1,699,970
Dec. 31Interest Expense18,349
Premium on Bonds Payable2,936
Cash21,285
31Retained Earnings74,101
Interest Expense74,101
31Bonds Payable473,000
Premium on Bonds Payable23,488
Loss on Redemption of Bonds20,600
Cash517,088
Final Questions
Considering the journal entries for both years, answer the following questions.
1. Were the bonds in the entry on Dec. 31 of Year 2 redeemed at maturity?
2. You suspect there is an error in one of the bond redemption entries. Assuming that the amounts are correct, which entry is questionable?
Why?
3. Why do some bonds sell below face value?
4. Which of the following items are amortized?
a. Bonds
b. Discounts
c. Future cash receipts
d. Redemption amount
e. Premiums
f. Contract rate of interest
g. It depends on the face value of the bond
h. Interest expenses
Solutions:
Hope this helps! In case of any clarifications, kindly use the comment box below. Kindly keep one question per post.