Question

Intermediate Accounting II Handout Homework Problem #4 On BONDS Payable for Chapter 14 Spring 2020 Due in class on Wednesday, February 12, 2020 On August 1, 2019. your company sold $150,000 of 8%, 10 year bonds when the market rate was 7%. These bonds pay interest annually on July 31 each year. Your company uses the interest method of amortization. Calculate the selling price of the bonds. Show the time value of money factors you entered into your calculator. Prepare an amortization table for the 10 year life of the bond. The table should have separate columns for each year (1 - 10), the beginning balance each year, the amount of the payment each year, the amount of interest each year, the amount of amortization each year, and the ending balance each year. It would probably be a good idea to use a spreadsheet for this table. Please round all amounts in this table to the nearest PENNY. Prepare journal entries from August 1, 2019, through December 31, 2020 (including adjusting and reversing entries), assuming your company's year ends on December 31. Put the appropriate date beside each journal entry. D. Prepare a list of the current liabilities AND THE AMOUNTS from the above transactions which should be reported on the balance sheet on December 31, 2019. E. Prepare a list of the NON current liabilities AND THE AMOUNTS from the above transactions which should be reported on the balance sheet on December 31, 2019.

Answer 1

A. Selling price of the bond = $ 160,535. PV factor for principal = 0.5083 and PV factor for interest = 7.0236

Here's the table showing the computation: If market interest rate is less than the bond coupon rate, it denotes bond issued at premium and if market rate is more than bond coupon rate, it denotes bond issued at discount.

FV of note/bond Payable Interest Rate FV of interest Market Interest Rate (r) PV Factor for note/bond payable (1/(1+(r/m)^n*m PV Factor for interest ((1-(1+(r/m))^-(n*m))/(r/m) Number of years (n) Payment per annum (m) PV of note/bond payable (rounded off to 0 decimal places) PV of interest (rounded off to 0 decimal places) Total PV (or) Selling price of Bond 150000 A 8% B 12000 C=A*B 7% D 0.5083 7.0236 F. 106 1 H 76,252.00 INATE 84,283.00 J=C*F 160,535.00 K=I+J

B. Amortization schedule as below (please read this table referring to or along with previous table):

Amortisation of Bond Premium or (Discount) Date Cash Payment Interest Expense L=outstanding balance * D/H MEC-L 1-Aug-19 31-Jul-20 31-Jul-21 31-Jul-22 31-Jul-23 31-Jul-24 31-Jul-25 31-Jul-26 31-Jul-27 31-Jul-28 31-Jul-29) 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 11,237 11,184 11,127 11,066 11,000 10,930 10,856 10,775 10,690 10,600 763 816 873 934 1,000 1,070 1,144 1,225 1,310 1,400 Outstanding Balance outstanding balance - M 160,535 159,772 158,956 158,083 157,149 156,149 155,079 153,935 152,710 151,400 150,000 10,535

C. Journal entries from 01-Aug-2019 through 31-Dec-2020 as below, including Year End closing entries:

Credit Explanation Debit $ 160,535 Journal Entries: Date Account Title 01-Aug-19 Dr. Cash Cr. Bond issued at premium Cr. Bond Payable (Being Bond issued at Premium) $ 10,535 $ 150,000 $ $ 4,682 318 31-Dec-19 Dr. Interest Expense Dr. Bond issued at premium Cr. Interest payable |(Being interest payment accrued) $11237 / 12 months * 5 months $ 763 / 12 months * 5 months 5,000 $ 12000 / 12 months * 5 months $ $11237 / 12 months * 7 months 31-Jul-20 Dr. Interest Expense Dr. Interest Payable $ $ 6,555 5,000 Dr. Bond issued at premium $ 445 $763 / 12 months * 7 months $ 12,000 Cr. Cash (Being Interest payment accounted) $ $ 4,660 340 31-Dec-20 Dr. Interest Expense Dr. Bond issued at premium Cr. Interest payable |(Being Interest payment accounted) $11184 / 12 months * 5 months $ 816 / 12 months * 5 months 5,000 $ 12000 / 12 months * 5 months $ $11184 / 12 months * 7 months 31-Aug-21 Dr. Interest Expense Dr. Interest Payable Dr. Bond issued at premium Cr. Cash |(Being Interest payment accounted) $ $ $ 6,524 5,000 476 $816 / 12 months * 7 months $ 12,000

D & E. Balance Sheet as of 31-Dec-2019: Always "Bond Amortization account (or) Bond Issued at premium account" has to be reported along with "Bonds Payable" account. In this case, Bond due to pay after 10 -year period and thus classified as non-current liabilities. As per above journal entries, Interest payable of $5,000 due to pay in following year and thus classified as "Current liabilities"

Balance Sheet as of December 31, 2019 Current Liabilities Interest Payable 5,000 Refer 31-Dec-2019 journal entry Non - current liablities Bond Payable 150000 Bond Issued at premium 10,217 $10535 - ($ 763/12*5)