Question

In: Accounting

Southwest Corporation issued bonds with the following details: Face value: $500,000 Interest: 8 percent per year...

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

Solutions

Expert Solution

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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