Question

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.

Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
January 1,2019	Cash [$10,000,000 x 0.96]	$9,600,000
	Discount on bonds payable		$400,000
	Bonds payable		$10,000,000
	[To record issuance of bonds]
December 31,2019	Interest expense	$1,160,000
	Discount on bonds payable ($400,000/10 years]	$40,000
	Interest payable [10,000,000 x 12%]		$1,200,000
	[To record accrued interest expense]

Requirement 2:

Balance Sheet
At December 31,2019
Bonds payble	$10,000,000
(Less): Discount on bonds payable [Unamortized*]	($360,000)	$9,640,000

Calculations:

Total discount on bonds	$400,000
Discount amortized	($40,000)
Unamortized discount	$360,000

Requirement .3:

Date	Account title and Explanation	Debit	Credit
January 1,2019	Interest payable	$1,200,000
	Cash		$1,200,000
	[To record payment of interest]
December 31,2020	Interest expense	$104,000
	Discount on bonds payable ($400,000/10 years]	$40,000
	Interest payable [10,000,000 x 12%]		$144,000
	[To record accrued interest expense]

Requirement 4:

Bonds issue price	$9,600,000
Add: Discount amortized till 2024 ($400,000/10) x 6	$240,000
Carrying value at Dec 31,2024	$9,840,000

I observed that Carrying value is increasing...

Requirement 5:

Date	Account title and Explanation	Debit	Credit
January 1,2029	Interest payable	$1,200,000
	Bonds payable	$10,000,000
	Cash		$11,200,000
	[To record payment of interest and redemption of bonds]