Question

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When market interest rates were 6%, three companies issued bonds on January 1, 2018. Each company has a December 31 year end and each company issued bonds with a face value of $102,000 that pay interest annually on December 31. Able Limited sold its bonds at 100 and offered a coupon interest rate of 6%, while Beta Corp. sold its bonds at 94 and offered a coupon interest rate of 4%, and Charles Inc. sold its bonds at 105 and offered a 7% coupon interest rate. Record the issue of the bonds by each company on January 1, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation Able Limited Jan. 1 Beta Corp. Jan. 1 Charles Inc. Jan. 1

Answer 1

A) Par value of the bonds issued Issue price percentage Bond's issue price, in dollars Able Ltd. $102,000 100% $102,000 Beta Corp. $102,000 94% $95,880 Charles Inc. $102,000 105% [Sold at 94 as given in the question] $107,100 ($102000 x 100%; $102000 x 94%; $102000 x 105%] As Able Ltd.'s bond is issued at price equals its par value, it is considered as 'issued at par';. It means firm will collect cash equals to par value of bonds issued; As Beta Corp.'s bond is issued at price less than its par value, it is considered as 'issued at discount'. It means firm will collect cash less than par value of bonds issued; As Charles Inc.'s bond is issued at price more than its par value, it is considered as 'issued at premium'; It means firm will collect cash more than par value of bonds issued; Therefore, journal entry to record issuance of bonds shall be: Credit Debit $102,000 $102,000 Date Account Titles and Explanation Able Ltd. Cash Jan. 1 Bonds Payable Beta Corp. Cash Jan. 1 Discount on bonds payable Bonds Payable Charles Inc. Cash Jan. 1 Bonds Payable Premium on Bonds Payable $95,880 $6,120 [Balancing figure --> $102000 - $95880 = $6120] $102,000 $107,100 $5,100 [Balancing figure -->$107100 - $102000 = $5100] $102,000

B) Interest expense shall be recorded by multiplyiing bond's carrying value before the interest payment date by market interest rate (yield to maturity). However, coupon payments shall be calculated by multiplying face value the bonds issued by stated annual coupon rate. Difference between the two is equal to amortization of discount or premium on bonds payable as applicable. However, interest expense and coupon payment will be same in case of bonds issued at par value as there will be neither discount nor premium on bonds payable to be amortized in this case. Therefore, journal entry to record first coupon payment shall be: Debit $6,120 $5,753 Date Account Titles and Explanation Able Ltd. Interest Expense Dec. 31 Cash Beta Corp. Interest Expense Dec. 31 Discount on bonds payable Cash Charles Inc. Interest Expense Dec. 31 Premium on Bonds Payable Bonds Payable Credit [$102000 x 6%] $6,120 ($95880 x 6%] $1,673 [Balancing figure --> $5753 - $4080 = $1673] $4,080 ($102000 x 4%] ($107100 x 6%] [Balancing figure --> $7140 - $6426 = $714] $7,140 ($102000 x 7%] $6,426 $714 C) Able Ltd. $102,000 Bond's issue price Add: Discount on bonds payable amortized Less: Premiium on bonds payable amortized Bond's carrying value as at December 31, 2018 Beta Corp. Charles Inc. $95,880 $107,100 $1,673 $714 $97,553 $106,386 $102,000