Bond Transactions Brand Company issued $1,000,000 face value, eight-year, 12% bo
ID: 2399110 • Letter: B
Question
Bond Transactions
Brand Company issued $1,000,000 face value, eight-year, 12% bonds on April 1, 2017, when the market rate of interest was 12%. Interest payments are due every October 1 and April 1. Brand uses a calendar year-end.
Required:
1. Identify and analyze the effect of the issuance of the bonds on April 1, 2017.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
2. Identify and analyze the effect of the interest payment on October 1, 2017.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
3. On December 31, Brand should
4. Determine the total cash inflows and outflows that occurred on the bonds over the eight-year life.
Activity Accounts Statement(s)Explanation / Answer
1
Issue of bonds raises cash and increases bonds payable liability.
Accounts effected are cash and bonds payable. Both increases.
Accounting equation:
2
Interest = 1,000,0000 * 12% * 6/12 = 60,000
Activity is interest payment. It affects interest expense and cash account. Interest expense increases and cash decreases.
accounting equation is below:
3
On december 31, brand should accrue interest expense for the period Oct to Dec. Which comes to = 1,000,000 * 12% * 3/12 = 30,000
4
Total cash inflows = 1,000,000
Total cash outflows = 16 interest payments of 60,000 and principal repayment = 16*60000 + 1,000,000 = 1,960,000
Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income Cash 10,00,000 Bonds payable 10,00,000