Prepare journal entries for the following: On 8/1/19 Wiley issued $500,000 in 6% 5 year bonds...
- Prepare journal entries for the following:
On 8/1/19 Wiley issued $500,000 in 6% 5 year bonds when the effective interest rate was 4%. The bonds pay interest on 8/1 and 2/1 each year. Wiley has a 12/31 year end.
- Compute the issuance price and prepare an amortization table.
- Prepare journal entries for the bonds for 2019 and 2020, don’t forget year-end adjustments. Assume no reversing entries.
- Repeat step b assuming reversing entries.
- Show the balance sheet presentations for the bonds on 12/31 for 2019 and 2020. (Make a t-account to keep track of the premium/discount)
- Compute the total cost of borrowing for the bond.
Homework Answers
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Answer 1
| Basic details | |
| Coupon rate per Period (6%/2) | 3% |
| Face value of bond | $ 500,000 |
| Market or Discounting rate per Period (4%/2) | 2% |
| Interest paid (500000*3%) | $ 15,000 |
| Number of interest payment (5*2) | 10 |
| Interest paid on | Semi annually |
| Period | PV factor @2% |
| 1 | 0.98039 |
| 2 | 0.96117 |
| 3 | 0.94232 |
| 4 | 0.92385 |
| 5 | 0.90573 |
| 6 | 0.88797 |
| 7 | 0.87056 |
| 8 | 0.85349 |
| 9 | 0.83676 |
| 10 | 0.82035 |
| Total | 8.98259 |
| Present value of face amount (500000*0.82035) | $ 410,175 |
| Present value of interest payment (15000*8.98259) | $ 134,739 |
| Issuance price of bonds | $ 544,914 |
| Issuance price of bonds | $ 544,914 |
| Less: face amount | $ 500,000 |
| Bond premium | $ 44,914 |
| Interest payment (Credit Cash) = Face value of bond * Coupon rate | |||||||
| Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate | |||||||
| Amortization of bond premium (Debit Bond Premium) = Interest payment - Interest Expense | |||||||
| Credit Balance in Bond premium = Credit Balance in Bond premium for previous period - Amortization of bond premium | |||||||
| Credit Balance in Bond Payable = Face value of bond | |||||||
| Book value of Bond = Credit Balance in Bond premium + Credit Balance in Bond Payable | |||||||
| Bond Premium Amortization Table | |||||||
| Credit Balance in Bond premium at end of retirement of bond payable must be Zero. | |||||||
| Period | Date | Interest payment (Cash paid) @ 6% | Interest Expense @ 5% | Amortization of bond premium | Credit Balance in Bond premium | Credit Balance in Bond Payable | Book (carrying) value of Bond |
| 0 | Aug 1, 2019 | $ 44,914 | $ 500,000 | $ 544,914 | |||
| 1 | Feb 1, 2020 | $ 15,000 | $ 10,898 | $ 4,102 | $ 40,812 | $ 500,000 | $ 540,812 |
| 2 | Aug 1, 2020 | $ 15,000 | $ 10,816 | $ 4,184 | $ 36,629 | $ 500,000 | $ 536,629 |
| 3 | Feb 1, 2021 | $ 15,000 | $ 10,733 | $ 4,267 | $ 32,361 | $ 500,000 | $ 532,361 |
| 4 | Aug 1, 2021 | $ 15,000 | $ 10,647 | $ 4,353 | $ 28,008 | $ 500,000 | $ 528,008 |
| 5 | Feb 1, 2022 | $ 15,000 | $ 10,560 | $ 4,440 | $ 23,568 | $ 500,000 | $ 523,568 |
| 6 | Aug 1, 2022 | $ 15,000 | $ 10,471 | $ 4,529 | $ 19,040 | $ 500,000 | $ 519,040 |
| 7 | Feb 1, 2023 | $ 15,000 | $ 10,381 | $ 4,619 | $ 14,421 | $ 500,000 | $ 514,421 |
| 8 | Aug 1, 2023 | $ 15,000 | $ 10,288 | $ 4,712 | $ 9,709 | $ 500,000 | $ 509,709 |
| 9 | Feb 1, 2024 | $ 15,000 | $ 10,194 | $ 4,806 | $ 4,903 | $ 500,000 | $ 504,903 |
| 10 | Aug 1, 2024 | $ 15,000 | $ 10,097 | $ 4,903 | $ 0 | $ 500,000 | $ 500,000 |
Answer 2
| Journal entries (Assume no reversing entries) | |||
| Date | Account title | Debit | Credit |
| Aug 1, 2019 | Cash | $ 544,914 | |
| Bond payable | $ 500,000 | ||
| Premium on bond payable | $ 44,914 | ||
| (To record issued of bond payable at Premium.) | |||
| Dec 31, 2019 | Interest expense (10898*4/6) | $ 7,265 | |
| Premium on bond payable (4102*4/6) | $ 2,735 | ||
| Interest payable | $ 10,000 | ||
| (To record accrue interest expense and amortization of bond premium.) (Aug to Dec = 4 months) | |||
| Feb 1, 2020 | Interest payable | $ 10,000 | |
| Interest expense (10898*2/6) | $ 3,633 | ||
| Premium on bond payable (4102*2/6) | $ 1,367 | ||
| Cash | $ 15,000 | ||
| (To record interest expense and amortization of bond premium.) | |||
| Aug 1, 2020 | Interest expense | $ 10,816 | |
| Premium on bond payable | $ 4,184 | ||
| Cash | $ 15,000 | ||
| (To record interest expense and amortization of bond premium.) | |||
| Dec 31, 2020 | Interest expense (10733*4/6) | $ 7,155 | |
| Premium on bond payable (4267*4/6) | $ 2,845 | ||
| Interest payable | $ 10,000 | ||
| (To record accrue interest expense and amortization of bond premium.) (Aug to Dec = 4 months) | |||
Answer 3
| Journal entries (Assume reversing entries) | |||
| Date | Account title | Debit | Credit |
| Aug 1, 2019 | Cash | $ 544,914 | |
| Bond payable | $ 500,000 | ||
| Premium on bond payable | $ 44,914 | ||
| (To record issued of bond payable at Premium.) | |||
| Dec 31, 2019 | Interest expense (10898*4/6) | $ 7,265 | |
| Premium on bond payable (4102*4/6) | $ 2,735 | ||
| Interest payable | $ 10,000 | ||
| (To record accrue interest expense and amortization of bond premium.) (Aug to Dec = 4 months) | |||
| Jan 1,2020 | Interest payable | $ 10,000 | |
| Interest expense | $ 7,265 | ||
| Premium on bond payable | $ 2,735 | ||
| (To record reversal of accrue interest expense) | |||
| Feb 1, 2020 | Interest expense | $ 10,898 | |
| Premium on bond payable | $ 4,102 | ||
| Cash | $ 15,000 | ||
| (To record interest expense and amortization of bond premium.) | |||
| Aug 1, 2020 | Interest expense | $ 10,816 | |
| Premium on bond payable | $ 4,184 | ||
| Cash | $ 15,000 | ||
| (To record interest expense and amortization of bond premium.) | |||
| Dec 31, 2020 | Interest expense (10733*4/6) | $ 7,155 | |
| Premium on bond payable (4267*4/6) | $ 2,845 | ||
| Interest payable | $ 10,000 | ||
| (To record accrue interest expense and amortization of bond premium.) (Aug to Dec = 4 months) | |||
Answer 4
| Premium on bond payable | |||
| Debit | Credit | ||
| Dec 31, 2019 | $ 2,735 | Aug 1, 2019 | $ 44,914 |
| Feb 1, 2020 | $ 1,367 | Balance 2019 | $ 42,179 |
| Aug 1, 2020 | $ 4,184 | ||
| Dec 31, 2020 | $ 2,845 | ||
| Balance 2020 | $ 33,783 | ||
| Partial Balance Sheet | |||
| Dec 31, 2019 | |||
| Current liability | |||
| Interest payable | $ 10,000 | ||
| Non-current liability | |||
| Bonds payable | $ 500,000 | ||
| Add: Premium on bond payable | $ 42,179 | $ 542,179 | |
| Partial Balance Sheet | |||
| Dec 31, 2020 | |||
| Current liability | |||
| Interest payable | $ 10,000 | ||
| Non-current liability | |||
| Bonds payable | $ 500,000 | ||
| Add: Premium on bond payable | $ 33,783 | $ 533,783 | |
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