Question

In: Accounting

On January 1, 2019, Ridge Company issued $10,000,000 face value bonds for 10 years at 12%....

On January 1, 2019, Ridge Company issued $10,000,000 face value bonds for 10 years at 12%. The bonds are issued at 96, and dated January 1. Interest is paid annually on January 1.

The end of Ridge’s fiscal year is December 31.

Required:

1.      Prepare the necessary journal entries for the year 2019.

2.      Show the balance sheet presentation on December 31, 2019.

3.      Prepare the necessary journal entries for the year 2020.

4.      What is the carrying value of the bonds at the end of the year 2024? What do you observe?

5.      Prepare the necessary journal entries on the maturity date January 1, 2029.

Solutions

Expert Solution

1. Journal entries

Date Account Debit Credit
01-01-2019 Cash 9600000
Discount on bonds payable 400000
Bonds payable 10000000
12-31-2019 Interest expense 1240000
Discount on bonds payable 40000*
Cash 1200000

* 400000 / 10 years (straight line amortization of discount)

2. Balance sheet (Partial)

Current liabilities
Interest payable 1200000
Long-term liabilities
Bonds payable 10000000
Less: Discount on bonds payable -360000*
9640000

* 400000 - 40000

3. Journal entries

Date Account Debit Credit
01-01-2020 Interest payable 1200000
Cash 1200000
12-31-2020 Interest expense 1240000
Discount on bonds payable 40000
Interest payable 1200000

4. Carrying value at end of 2024 = 9840000

Year Interest Discount amortized Carrying value
2019 9600000
2019 1200000 40000 9640000
2020 1200000 40000 9680000
2021 1200000 40000 9720000
2022 1200000 40000 9760000
2023 1200000 40000 9800000
2024 1200000 40000 9840000
2025 1200000 40000 9880000
2026 1200000 40000 9920000
2027 1200000 40000 9960000
2028 1200000 40000 10000000

5. Journal entries

Date Account Debit Credit
01-01-2029 Interest payable 1200000
Cash 1200000
01-01-2029 Bonds payable 10000000
Cash 10000000

ekkarill92 answered 2 years ago
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