Question

es EX 11-1 Bond price Obj. 1 United States Steel Corporation's 7.5% bonds due in 2022 were reported as selling for 104.5. Were the bonds selling at a premium or at a discount? Why is United States Steel able to sell its bonds at this price? WORLD EX 11-2 Entries for issuing bonds Obj. 2 Thomson Co. produces and distributes semiconductors for use by computer manufacturers. Thomson issued $900,000 of 10-year, 7% bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year: May 1. Issued the bonds for cash at their face amount Nov. 1. Paid the interest on the bonds. Dec. 31. Recorded accrued interest for two months. -781,118 WOW EX 11-3 Entries for issuing bonds and amortizing discount by straight-line method Obj. 2 On the first day of its fiscal year, Chin Company issued $10,000,000 of five-year, 7% bonds to finance its operations of producing and selling home improvement products. Interest is pay- able semiannually. The bonds were issued at a market (effective) interest rate of 8%, resulting in Chin receiving cash of $9.594,415. A. Journalize the entries to record the following: 1. Issuance of the bonds. 2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round to the nearest dollar.) 3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round to the nearest dollar.) B. Determine the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only $9.594,415 rather than for the face amount of $10,000,000. EX 11-4 Entries for issuing bonds and amortizing premium by straight-line method Obj. 2 Smiley Corporation wholesales repair products to equipment manufacturers. On April 1 Year Smiley issued $20,000,000 of five-year, 9 bonds at a market (effective interest rate of sm receiving cash of $20,811,010. Interest is payable semiannually on April 1 and October 1. Journalize the entries to record the following: A. Issuance of bonds on April 1, Year 1. B First interest payment on October 1, Year 1, and amortization of bond premium for six months, using the straight-line method. Explain why the company was able to issue the bonds for $20,811,010 rather than for the face amount of $20,000,000

Answer 1

EX 11-1:

Face value of the bond	$100
(-) Selling price	($104.50)
Discount(Premium) on bonds payable	($5)

Bonds issued at premium due to effective interest rate is lower than the coupon rate.

EX 11-2:

Date	Account title and explanation	Debit	Credit
May 1	Cash	$900,000
	Bonds payable		$900,000
	[To record issuance of Bonds ]
Nov.1	Interest expense	$31,500
	Cash [900,000 x 7% x (6/12)]		$31,500
	[To record semi-annual interest payment]
Dec.31	Interest expense	$10,500
	Interest payable [900,000 x 7% x (2/12)]		$10,500
	[To record accrued interest]

EX 11-3:

Requirement A

	Account title and explanation	Debit	Credit
1	Cash	$9,594,415
	Discount on bonds payable	$405,585
	Bonds payable		$10,000,000
	[To record issuance of Bonds ]
2	Interest expense	$390,559
	Discount on bonds payable [405,585/5] x (6/12)		$40,559
	Cash [10,000,000 x 7% x (6/12)]		$350,000
	[To record first semi-annual interest payment]
3	Interest expense	$390,559
	Discount on bonds payable [405,585/5] x (6/12)		$40,559
	Cash [10,000,000 x 7% x (6/12)]		$350,000
	[To record second semi-annual interest payment]

Requirement B:

Interest expense for the first year = 390,559+390,559 = $781,117

Requirement C:

Bonds issued at discount because effective interest rate is higher than the coupon rate.

EX 11-4:

	Account title and explanation	Debit
A	Cash	$20,811,010
	Bonds payable
	Premium on bonds payable
	[To record issuance of Bonds ]
B	Interest expense	$818,899
	Premium on bonds payable (811,010/5) x (6/12)	$81,101
	Cash [20,000,000 x 9% x (6/12)]
	[To record first semi-annual interest payment]

C.Bonds issued at premium because effective interest rate is lower than the coupon rate