Question

P10-Special

The XYZ Co. sold $3,000,000, 8%, 10 year bonds on January 1, 2018. The bonds were dated January 1, 2018, and pay interest on January 1. The company uses the effective interest method to amortize bond premiums and discounts. Financial statements are prepared annually.

Instructions

a) Prepare the journal entries to record the issuance of the bonds assuming they are sold at:

        (1) 103 (i.e. 103% of face) due to the market interest rate of 7%

        (2) 98   (i.e. 98% of face) due to the market interest rate of 8.5%

b) Prepare amortization tables for both assumed sales for the first three interest payments.

c) Prepare the journal entries to record interest expense for 2018 under both of the bond issuances assumed in part (a).

d) Show the long-term liabilities balance sheet presentation for both of the bond issuances assumed in part (a) at December 31, 2018

Answer 1

Solution:

First of all we solve all the requirements assuming bonds are sold at 103% of face due to the market interest rate 7% and then all the requirements assuming 98% of face and market interest rate 8.5%

Assuming bonds are sold at 103 (i.e. 103% of face) due to the market interest rate of 7%

Issue Price of the bonds = Face value $3,000,000 x 103% = $3,090,000

Face Value of the bonds = $3,000,000

Issue price is higher than face value, it means bonds are issued at premium.

Premium on Bonds Payable = $3,090,000 – 3,000,000 = $90,000

Part a – entry to record issuance of the bonds

Date	General Journal	Debit	Credit
Jan.1, 2018	Cash (Issue price)	$3,090,000
	Bonds Payable (Face Value)		$3,000,000
	Premium on Bonds Payable (Bal. fig)		$90,000

Part b -- amortization tables for for the first three interest payments at market interest rate 7%

Schedule of Amortization of Bond PREMIUM (Effective Rate Method)
Payment intervals	Date	Cash Paid (Face Value of the Bonds $3,000,000 x Coupon Rate 8%)	Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 7%)	Premium Amortized (Cash Paid - Interest Expense)	Premium on Bonds Payable (Unamortized Portion B/S)	Par Value of Bonds Payable	Carrying Value of the bonds at the end of period (Par Value + Balance of Unamortized Bond Premium)
0	Jan.1, 2018				$90,000	$3,000,000	$3,090,000
1	Dec.31, 2018	$240,000	$216,300	$23,700	$66,300	$3,000,000	$3,066,300
2	Dec.31, 2019	$240,000	$214,641	$25,359	$40,941	$3,000,000	$3,040,941
3	Dec.31, 2020	$240,000	$212,866	$27,134	$13,807	$3,000,000	$3,013,807

Part c -- entries to record interest expense for 2018 at market interest rate 7%

Date	General Journal	Debit	Credit
Dec.31, 2018	Interest Expense	$216,300
	Premium on Bonds Payable (Bal. fig)	$23,700
	Interest Payable or Cash (Face Value $3,000,000 * Coupon Rate 8%)		$240,000
Dec.31, 2019	Interest Expense	$214,641
	Premium on Bonds Payable (Bal. fig)	$25,359
	Interest Payable or Cash (Face Value $3,000,000 * Coupon Rate 8%)		$240,000
Dec.31, 2020	Interest Expense	$212,866
	Premium on Bonds Payable (Bal. fig)	$27,134
	Interest Payable or Cash (Face Value $3,000,000 * Coupon Rate 8%)		$240,000

Part d -- long-term liabilities balance sheet presentation

Balance Sheet (partial)
Long Term Borrowings:
Bonds Payable (face Value)	$3,000,000
Add: Premium on Bonds Payable	$66,300
Carrying Value of Bonds Payable		$3,066,300

Assuming bonds are sold at 98   (i.e. 98% of face) due to the market interest rate of 8.5%

Issue Price of the bonds = Face value $3,000,000 x 98% = $2,940,000

Face Value of the bonds = $3,000,000

Issue price is less than face value, it means bonds are issued at discount

Discount on Bonds Payable = 3,000,000 – 2,940,000 = $60,000

Part a – entry to record issuance of the bonds

Date	General Journal	Debit	Credit
Jan.1, 2018	Cash (Issue price)	$2,940,000
	Discount on Bonds Payable (Bal. fig)	$60,000
	Bonds Payable (Face Value)		$3,000,000

Part b -- amortization tables for for the first three interest payments at market interest rate 8.5%

Schedule of Amortization of Bond DISCOUNT (Effective Rate Method)
Payment intervals	Date	Cash Paid (Face Value of the Bonds $3,000,000 x Coupon Rate 8%)	Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 8.5%)	Discount Amortized (Interest Expense - Cash Paid)	Discount on Bonds Payable (Unamortized Portion B/S)	Par Value of Bonds Payable	Book Value (Par Value - Balance of Unamortized Bond Discount)
0	Jan.1, 2018				$60,000	$3,000,000	$2,940,000
1	Dec.31, 2018	$240,000	$249,900	$9,900	$50,100	$3,000,000	$2,949,900
2	Dec.31, 2019	$240,000	$250,742	$10,742	$39,358	$3,000,000	$2,960,642
3	Dec.31, 2020	$240,000	$251,655	$11,655	$27,704	$3,000,000	$2,972,296

Part c -- entries to record interest expense for 2018 at market interest rate 7%

Date	General Journal	Debit	Credit
Dec.31, 2018	Interest Expense	$249,900
	Discount on Bonds Payable (Bal. fig)		$9,900
	Interest Payable or Cash (Face Value $3,000,000 * Coupon Rate 8%)		$240,000
Dec.31, 2019	Interest Expense	$250,742
	Discount on Bonds Payable (Bal. fig)		$10,742
	Interest Payable or Cash (Face Value $3,000,000 * Coupon Rate 8%)		$240,000
Dec.31, 2020	Interest Expense	$251,655
	Discount on Bonds Payable (Bal. fig)		$11,655
	Interest Payable or Cash (Face Value $3,000,000 * Coupon Rate 8%)		$240,000

Part d -- long-term liabilities balance sheet presentation

Balance Sheet (partial)
Long Term Borrowings:
Bonds Payable (face Value)	$3,000,000
Less: Discount on Bonds Payable	($50,100)
Carrying Value of Bonds Payable		$2,949,900

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