Question

SophCO Inc. needs to acquire funding for expanding their warehousing operation. They estimate that to build the necessary facilities and purchase the equipment for them they will have to spend 175,000,000. The company has a number of different funding options available to them including issuing addition shares of preferred stock, borrowing from a financial institution or issuing debenture bonds.The company’s financial advisor has reviewed all of the options and has suggested issuing bonds to raise the funds needed. The company has 25,000,000 in a construction reserve that it plans to use for the project. The company decided to issue bonds for the remainder of the funds needed.The Bond Consul recommends that the coupon rate on the bond should be 8%, the term should be for 25 years and interest will be paid annually. The bonds will be sold on 1/1/18. The bond discount/premium will be amortized using the straight-line method.

  a. Assume the bonds are sold at 95, make the journal entry on 1/1/18 and 12/31/18.

b. Assume the bonds are sold at 103, make the journal entry on 1/1/18 and 12/31/18.

DATE	ACCOUNT	DR	CR

Answer 1

Bonds discount or premium straight line amortisation

Discount/ Premium on Bonds Payable/ Number of years of bond term

SophCo Inc Date Account Titles and Explanation Bonds sold at 95 Debit Credit Calculation 1-Jan-18 Cash -150000000*95% 142,500,000 7,500,000 Discount on Bonds Payable Bonds Payable Balancing figure 150,000,000 175000000-25000000 31-Dec-18 Interest expense 12,300,000 Discount on Bonds Payable Cash 300,000 12,000,000 7500000/25 150000000*8% Bonds sold at 103 1-Jan-18 Cash 154,500,000 -150000000*103% Premium on Bonds Payable Bonds Payable 4,500,000 Balancing figure 150,000,000 175000000-25000000 31-Dec-18 Interest expense 11,820,000 180,000 -4500000/25 Premium on Bonds Payable Cash 12,000,000 150000000*8%