Question

These are the correct answers but I am having difficulty figuring out how these figures were reached.

On March ​1, 2018​, Nailtique Nail Salons issued $450,000 of 15​-year, 5 percent bonds payable. The bonds were sold for $432,000. The bonds pay interest each August 31 and February 28​, and any discount or premium is amortized using​ straight-line amortization.

Requirement 1. Fill in the blanks to complete each statement.

a.

Nailtique Nail Salons' bonds are priced at (express the price as a percentage)

96 (432000/450000) X 100

%.

b. When Nailtique Nail Salons issued its​ bonds, the market interest rate was Higher than 5

percent.

c.

The amount of bond discount or premium is $

18,000 (450000-432000)

.

Requirement 2. Record each transaction. ​(Do not round any intermediary​ computations, but then round all amounts you enter into the journal entry tables to the nearest whole dollar. Record debits​ first, then credits. Exclude explanations from any journal​ entries.)

a. Issuance of the bonds payable on March ​1, 2018

Journal Entry
Date		Accounts	Debit	Credit
Mar	1	Cash	432,000
		Discount on bonds payable	18,000
		Bonds payable		450,000

b. Payment of interest​ (and amortization of discount or​ premium, if​ any) on August 31​, 2018.

Journal Entry
Date		Accounts	Debit	Credit
Aug	31	Interest expense	11,850
		Discount on bonds payable		600
		Cash (450000 X 5%) /2		11,250

c. Accrual of interest​ (and amortization of discount or​ premium, if​ any) on December 31​, 2018

Journal Entry
Date		Accounts	Debit	Credit
Dec	31	Interest expense	7,900
		Discount on bonds payable		400
		Interest payable		7,500

Requirement 3. At what amount will Nailtique Nail Salons report the bonds on its balance sheet at December 31​, 2018​?

c.	On its balance sheet at December 31, 2018, the company will report the bonds at			the carrying amount
	of $	433,000	.

Answer 1

Req 1:

a

Price percentage = proceeds received/ face value = $432,000/$450,000 × 100 = 96%

b

Bond discount = face value – proceeds = $450,000 - $432,000 = $18,000

Req 2:

a

Cash is debited for amount received $432,000

Discount on bonds payable is contra liability and debited for $18,000 as calculated above.

Bonds payable is credited for its face value of $450,000

b

Discount on bond payable amortization per month = $18,000/ 15(bond life) × 1/12 = $100 per month.

As on August Discount on bonds payable amortization for six months = $100 × 6 = $600

Cash paid = face value × interest rate × 6/12 (six months) = $450,000 × 5% × 6/12 = $11,250

Interest expense = cash paid + discount on bonds payable amortization = $600 + $11,250 = $11,850

c

As on Dec Discount on bonds payable amortization for four (Sep to Dec) months = $100 × 4 = $400

Interest accrued for four months – interest payable = face value × interest rate × 4/12 (four months) = $450,000 × 5% × 4/12 = $7,500

Interest expense = interest payable + discount on bonds payable amortization = $400 + $7,500 = $7,900

Balance in discount on bonds payable = Original amount – amortization in Aug – Amortization in Dec

= $18,000 - $600 - $400 = $17,000

Carrying value of bonds = face value of bonds- balance in discount on bonds payable

= $450,000 - $17,000 = $433,000

Hope you got it.

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