Bond Discount, Entries for Bonds Payable Transactions On July 1, 2014, Brower In
ID: 2445451 • Letter: B
Question
Bond Discount, Entries for Bonds Payable Transactions
On July 1, 2014, Brower Industries Inc. issued $2,300,000 of 4-year, 10% bonds at a market (effective) interest rate of 12%, receiving cash of $2,157,175. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Required:
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. For a compound transaction, if an amount box does not require an entry, leave it blank.
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Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.
The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
Learning Objective 2, Learning Objective 3.
2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank.
a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
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Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.
The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
Learning Objective 2, Learning Objective 3.
b. The interest payment on June 30, 2015, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
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Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.
The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
Learning Objective 2, Learning Objective 3.
3. Determine the total interest expense for 2014. Round to the nearest dollar.
$
4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest?
SelectYesNoCorrect 2 of Item 4
5. Compute the price of $2,157,175 received for the bonds by using Table 1 and Table 2. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.
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Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.
The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
Learning Objective 2, Learning Objective 3.
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1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. For a compound transaction, if an amount box does not require an entry, leave it blank.
Explanation / Answer
Part 1
Journal entry for Issue of bond and discount bonds payable.
2(a)
2(b)
3)
Total interest expense for 2014 would be $115,000
4)
Yes, the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest. As the investor will not pay more for the bonds which offer interest rate less then the market rate.
5)
Present value of face value = 2,300,000 x .62741 = 1,443,043
Present value of the semi annual interest payment = 115,000 x 6.20979 = 714,126
Price received for bonds = 1443043 + 714126 = $2,157,175
Hope this helps.
July 1 2014 Cash $ 2,157,175 Discount on Bonds Payable $ 142,825 Bonds Payable $ 2,300,000