On January 1st 2017 the Bilbo Company issued (sold) S100,000 of 8% semi-annual 1
ID: 2585130 • Letter: O
Question
On January 1st 2017 the Bilbo Company issued (sold) S100,000 of 8% semi-annual 10 year bonds for S124,000. Each of these 100 bonds came with 4 detachable warrants. Each warrant allowed the holder the right to purchase 10 shares of Bilbo ($5 par) common stock at $45 per share. At the time the bonds were issued each warrant was detetmined to be worth $100 each set. a) make the journal entry Bilbo makes on January 1st when it sells the bonds with the detachable warrants 8 b) Since the difference is not material, Bilbo has elected to use the straight-line method to amortize the interest on their bonds 9 make the journal entry Bilbo makes on July 1st 2017 when they make the first interst payment 10 11 c) On October 1st, all of the warrants are redeemed and Bilbo issues the stock connected with the warrants 12 make the journal entry Bilbo makes when it issues the stock 13 d) Make the adjusting entry Bilbo needs on December 31st 2017 (remember the interst isn't paid until January 1st) 15 6 14 e) make the entry Bibo makes on January 1st when it makes the second interst payment f) On January 2nd Bilbo retires all of the bonds by paying S100.000. Make the necessary entry for Bilbo at the retirement of the bonds.Explanation / Answer
a)
01/01/17 Cash a/c dr. $124000
To Bonds Payable $100000
To Detachable Warrants $10000
To Premium on Bonds Payable $14000
Notes-
10000 Bonds@100 each = $100,000
Detachable warrants= 10000/100=100sets or 400.
Value of Detachable Warrants=100*100=10000
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b.)
07/01/2017 Interest Expenses a/c dr. $3300
Premium on Bonds Payable a/c dr. $700
To Cash $4000
Notes-
Interest calculation
$4000($100000*8%*6/12)
Premium should be 0 at the end of bonds life; hence it would be charged with interest as [$14000/(10*2)]
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d.)
12/31/2017 Interest Expenses a/c dr. $3300
Premium on Bonds Payable a/c dr. $700
To Interest Payable a/c $4000
Notes-
Interest calculation
$4000($100000*8%*6/12)
Premium should be 0 at the end of bonds life; hence it would be charged with interest as [$14000/(10*2)]
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e.)
01/01/2018 Interest Payable a/c dr. $4000
To Cash a/c $4000
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01/02/2018 Bonds Payable a/c dr. $100000
To Cash a/c $100000
01/02/2018 Premium on bonds payable a/c dr. $12600
To gain on retirement of bonds $12600