Question

1 Bonds payable-various issues On January 1, 2018, $50 million face amount of 9%, 10-year bonds were issued. The bonds pay interest on an annual basis on December 31 each year. The market interest rates were slightly higher than 9% when the bonds were sold. Required: b. Calculate the interest that will be paid annually on these bonds? Explain if the bonds were issued at a premium or discount? What does it mean to issue a share at a premium? Interest on bonds has not been accrued for 6 months. On 30 June 2018 what will be the adjustments required-use a journal to show this or the horizontal method.

Answer 1

a.
Calculation of interest paid on bonds
Interest paid on bonds	Face value*Coupon rate
Interest paid on bonds	$50 million*9%
Interest paid on bonds	$4.50	million
b.
The market interest rate was higher than coupon rate of 9% and thus the bond would have been issued at discount. This is because investors required higher return as compared to coupon rate of 9%
Shares are issued at premium when the price of shares issued is more than its par value.
c.
Adjustment for accrued June interest using journal is shown below
General Journal	Debit	Credit
Interest expense	xxx		(Price of bond*Market interest rate)
Discount on bonds payable		xxx	(Interest expense-Interest payable)
Interest payable		xxx	(Par value of bond*Coupon rate)
Coupon is not paid and thus interest payable is credited as liability