Question

During 2016 and 2017, Agatha Corp. completed the following transactions relating to its bond issue. The corporation’s fiscal year is the calendar year.

2016

Jan. 1	Issued $230,000 of 10-year, 6 percent bonds for $221,000. The annual cash payment for interest is due on December 31.
Dec. 31	Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec. 31	Closed the interest expense account.

2017

Dec. 31	Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec. 31	Closed the interest expense account.

b.	Prepare the general journal entries for the above transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
2016

Jan. 1	Issued $230,000 of 10-year, 6 percent bonds for $221,000. The annual cash payment for interest is due on December 31.
Dec. 31	Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec. 31	Closed the interest expense account.

2017

Dec. 31		Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec. 31		Closed the interest expense account.
c. .	Prepare the liabilities section of the balance sheet at December 31, 2016 and 2017. (Amounts to be deducted should be indicated with minus sign.) 2016 2017 Liabilities Carrying value of bonds payable

         

d.		Determine the amount of interest expense that will be reported on the income statements for 2016 and 2017.
	Interest expense 2016 2017

e.	Determine the amount of interest that will be paid in cash to the bondholders in 2016 and 2017.

	Interest paid 2016 2017

Answer 1

	Discount on issue	$              9,000
	No of interest payments	10
	Straight line amortisation of discount	$ 900
	Interest	6.0%
	Interest Expense on Dec 31,2016
	Interest Payment	$ 13,800
	Discount Amortisation	$ 900
		$ 14,700
	Interest Expense on Dec 31,2017
	Interest Payment	$ 13,800
	Discount Amortisation	$ 900
		$ 14,700
	Journal Entry
2016
Date	Account Name	Debit	Credit
1-Jan	Cash	$ 221,000
	Discount on Bonds payable	$ 9,000
	Bonds payable		$ 230,000
	( Bonds Issued at discount)
31-Dec	Interest Expense	14,700
	Discount on Bonds payable		900
	Cash		13,800
	( Interest paid and Discount amortised)
31-Dec	Income Summary	14,700
	Interest Expense		14,700
	( Interest Expenses account closed to Income Summary)
2017
31-Dec	Interest Expense	14,700
	Discount on Bonds payable		900
	Cash		13,800
	( Interest paid and Discount amortised)
31-Dec	Income Summary	14,700
	Interest Expense		14,700
	( Interest Expenses account closed to Income Summary)
c.		2016			2017
	Liabilities
	Bonds Payable, 6%	$         230,000		$ 230,000
	Less: Discount on Bonds Payable	$           (8,100)	$ 221,900	$    (7,200)	$ 222,800
d	Interest Expense
2016	$14,700
2017	$14,700
e	Interest Paid
2016	$ 13,800
2017	$ 13,800