Question

Analyzing and Reporting Financial Statement Effects of Bond Transactions
Lundholm, Inc., reports financial statements each December 31 and issues $600,000, 7%, 15-year bonds dated May 1, 2012, with interest payments on October 31 and April 30. Assuming the bonds are sold at par on May 1, 2012, complete the financial statement effects template to reflect the following events: (a) bond issuance, (b) the first semiannual interest payment, and (c) retirement of $200,000 of the bonds at 101 on November 1, 2012.

Use negative signs with your answers, when appropriate.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
(a)	Answer		Answer		Answer		Answer		Answer
(b)	Answer		Answer		Answer		Answer		Answer
(c)	Answer		Answer		Answer		Answer		Answer

Income Statement
Revenue	-	Expenses	=	Net Income
Answer		Answer		Answer
Answer		Answer		Answer
Answer		Answer		Answer

Answer 1

• Workings:

‘a’

Issued at $ 600,000 par = Cash received = Bonds Payable = $ 600,000

‘b’

First six month interest = 600000 x 7% x 6/12 = $ 21,000 paid in cash, recorded as “Interest expenses”

‘c’

Amount repaid = $ 200,000 x 101% = $ 202,000. Loss(accounted as Expense) on repayment = 202000 – 200000 = $ 2000

• Answers

Balance Sheet											Income Statement
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed	+	Earned		Revenue	-	Expenses	=	Net
							Capital		Capital						Income
(a)	$              600,000.00		$                      -		$                            600,000.00		$                                                -		$                    -		$              -		$                -		$                       -
(b)	$              (21,000.00)		$                      -		$                                         -		$                                                -		$        (21,000.00)		$              -		$    21,000.00		$          (21,000.00)
(c)	$             (202,000.00)				$                           (200,000.00)		$                                                -		$          (2,000.00)		$              -		$      2,000.00		$            (2,000.00)