In: Accounting
Southwest Corporation issued bonds with the following details: Face value: $500,000 Interest: 8 percent per year payable each December 31 Terms: Bonds dated January 1, 2018, due five years from that date The annual accounting period ends December 31. The bonds were issued at 105 on January 1, 2018, when the market interest rate was 7 percent. Assume the company uses straight-line amortization and adjusts for any rounding errors when recording interest expense in the final year. Required: 1. Compute the cash received from the bond issuance in dollars. TIP: The issue price typically is quoted at a percentage of face value. 2. & 3. Prepare the journal entry to record the issuance of the bonds and the payment of interest on December 31, 2018 and 2019. 4-a. How much interest expense would be reported on the income statements for 2018 and 2019? 4-b. Compute the bond value which should be reported on the balance sheets at December 31, 2018 and 2019
Solution:
1)
Bond issue privce = face value *105%
=$500,000*105%
=$525,000
2&3)
Premium on issue of bond = issue price - face value
=$525,000 - $500,000
=$25,000
Period = 5 years
Annual amortization of premium on Bond = $25,000 /5
=$5,000
Journal entries:
Date | Account title and explanation | Debit | Credit |
01 Jan 2018 | Cash | $525,000 | |
To bonds payable | $500,000 | ||
To preimum on bonds | $25,000 | ||
(Being bond issued at premium) | |||
31 Dec 2018 | Interest expenses | $35,000 | |
Premium on bond | $5,000 | ||
To cash ($500,000*8%) |
$40,000 | ||
(To record payment of interest) | |||
31 Dec 2019 | Interest expense | $35,000 | |
Premium on bond | $5,000 | ||
To cash ($500,000*8%) |
$40,000 | ||
(To record payment of interest) | |||
4a)
2018 | 2019 | |
Interest expense | $35,000 | $35,000 |
4b)
Balance sheet:
2018 | 2019 | |
Long term liabilities: | ||
Bond payable | $500,000 | $500,000 |
Add: Unamortized premium |
$20,000 ($25,000 - $5000) |
$15,000 ($20,000 - $5000) |
Carrying value | $520,000 | $515,000 |
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