Question

Southwest Corporation issued bonds with the following details:

Face value: $1,080,000

Interest: 10.5 percent per year payable each December 31

Terms: Bonds dated January 1, 2015, due five years from that date

The annual accounting period ends December 31. The bonds were issued at 104 on January 1, 2015, when the market interest rate was 9.5 percent. Assume the company uses effective-interest amortization and adjusts for any rounding errors when recording interest expense in the final year.

Required:

1.	Compute the cash received from the bond issuance in dollars. TIP: The issue price typically is quoted at a percentage of face value.

2.	Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

3.	Prepare the journal entries to record the payment of interest on December 31, 2015 and 2016. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Round your answers to the nearest whole dollar.)

4-a.	How much interest expense would be reported on the income statements for 2015 and 2016? (Round your answers to the nearest whole dollar.)

4-b.	Compute the bond value which should be reported on the balance sheets at December 31, 2015 and 2016. (Round your intermediate calculations and final answers to the nearest whole dollar.)

Answer 1

• All working forms part of the answer
• Amortisation schedule:

Bond issue price = $ 1,080,000 x 1045 = $ 1,123,200

Period	Cash payment	Interest expense	Premium on Bonds payable	Carrying Value of Bond
	[A = 1080000 x 10.5%]	[B = D x 9.5%]	[C = B – A]	[D = D +C]
Issued 2015			$               43,200.00 [1080000 x 4%]	$                11,23,200.00
Year 1 end 2015	$               1,13,400.00	$         1,06,704.00	$               (6,696.00)	$                11,16,504.00
Year 2 end 2016	$               1,13,400.00	$         1,06,068.00	$               (7,332.00)	$                11,09,172.00

• Requirement 1: cash received = 1080000 x 104% = $ 1,123,200
• Requirement 2: Journal Entry for issuance

Date	Accounts titles	Debit	Credit
01-Jan	Cash	$    11,23,200.00
	Premium on Bonds payable		$                43,200.00
	Bonds payable		$          10,80,000.00

• Requirement 3:

Date	Accounts titles	Debit	Credit
31-Dec-15	Interest expense	$       1,06,704.00
	Premium on Bonds payable	$          (6,696.00)
	Cash		$            1,13,400.00
31-Dec-16	Interest expense	$       1,06,068.00
	Premium on Bonds payable	$             7,332.00
	Cash		$            1,13,400.00

• Requirement 4 –

Bond’s value to be reported on Balance Sheet on 31 Dec 2015 and 31 Dec 2016 = $ 1,080,000.00