Bond Premium, Entries for Bonds Payable Transactions Maui Blends, Inc. produces
ID: 2470243 • Letter: B
Question
Bond Premium, Entries for Bonds Payable Transactions
Maui Blends, Inc. produces and sells organically grown coffee. On July 1, 2014, Maui Blends, Inc. issued $1,800,000 of 10-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $2,006,459. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Required:
For all journal entries with a compound transaction, if an amount box does not require an entry, leave it blank.
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2014. Round to the nearest dollar.
$
4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?
SelectYesNo
5. Compute the price of $2,006,459 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.
Hide1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014.
Explanation / Answer
Solution:
Par Value of Bond = $1,800,000
Coupon Rate (Annually) = 14% or 7% semi annually
Coupon Interest Amount to be paid on each interest payment date = $1,800,000 x 14% x ½ = $126,000
Issue Price of Bond = $2,006,459
Life of Bond = 10 years
No. of payments to be done during the life of bond = 10 x 2 = 20
Since, Issue price is high than par value, bonds are issued at premium.
Premium on Bonds Payable = Issue Price - Par Value = $2,006,459 - $1,800,000 = $206,459
Premium on Bonds Payable $206,459 is amortized over the life of the bonds. Each time when the interest payment will be made $10,323 ($206,459 / 20) needs to be amortized.
1) Journal Entry to record the issuance of bond on July 1, 2014
Date
Account Title and Explanation
Debit
Credit
July 1, 2014
Cash A/c Dr.
$2,006,459
To Bonds Payable
$1,800,000
To Premium on Bonds Payable
$206,459
(Being bonds issued at premium)
2)
a) Journal Entry to record first semiannual interest payment on December 31, 2014, and the amortization of the bond premium
Date
Account Title and Explanation
Debit
Credit
Dec 31, 2014
Interest Expenses Dr.
$115,677
Amortization of Discount on Bonds Payable Dr.
$10,323
To Cash Interest Payable to Bond Holders
$126,000
(being Interest expenses recorded)
Interest Expenses = Cash Interest to be paid - Amortization Amount of Premium on Bonds Payable = $126,000 - $10,323 = $115,677
On payment of Cash Interest
Date
Account Title and Explanation
Debit
Credit
Dec 31, 2014
Cash Interest Payable to Bond Holders Dr.
$126,000
To Cash A/c
$126,000
(Cash Interest paid to bond holders)
b) The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method.
Date
Account Title and Explanation
Debit
Credit
June 30, 2015
Interest Expenses Dr.
$115,677
Amortization of Discount on Bonds Payable Dr.
$10,323
To Cash Interest Payable to Bond Holders
$126,000
(being Interest expenses recorded)
Interest Expenses = Cash Interest to be paid - Amortization Amount of Premium on Bonds Payable = $126,000 - $10,323 = $115,677
On payment of Cash Interest
Date
Account Title and Explanation
Debit
Credit
June 30, 2015
Cash Interest Payable to Bond Holders Dr.
$126,000
To Cash A/c
$126,000
(Cash Interest paid to bond holders)
3) Total interest expense for 2014
Since bond was issued on July 1, 2014, the total interest expenses to be recorded for year 2014 is for 6 months.
Interest Expenses for 2014 = Cash Interest to be paid - Amortization Amount of Premium on Bonds Payable = $126,000 - $10,323 = $115,677
4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest – YES
Explanation --- When the market rate is less than the coupon rate, the bond sells at a premium. The premium declines as maturity approaches.
For rest part --- please ask separate question..
Date
Account Title and Explanation
Debit
Credit
July 1, 2014
Cash A/c Dr.
$2,006,459
To Bonds Payable
$1,800,000
To Premium on Bonds Payable
$206,459
(Being bonds issued at premium)