Question

Notes Payable CHAPTER 10 Record the journal entries on the books of Stanley's Garage, Inc. for the following transactions: October 1, 2019: Borrowed $60,000 from Wells Fargo Bank and signed a 10 month, 8% note. December 31, 2019: Made the necessary year-end adjusting journal entry for the note. August 1, 2020: Repaid the note plus all interest due to Wells Fargo Credit Date October 1, 2019 Accounts Cash ble payable 1 Debit 600,000 ! December 31, 2019 400 Iotrest Expense Intres) payable 1910 August 1, 2020 Intrest Payable | Note Payable Cash 4000 160.000 64000 BONDS Scenario 1 Rockhounds, Inc. issued $500,000 of five-year, 6% bonds on January 1, 2017. Interest is paid semi- annually. The market rate of interest on the date of issuance was 8%. Will these bonds sell at face value, at a discount or at a premium? Calculate the issuance price of the bonds in the space below.

can someone explain how to do these?

Answer 1

Solution Question #1: Notes Payable Credit Date Oct.1, 2019 Accounts Cash Notes Payable (To record borrowing from Wells Fargo Bank) Debit $60,000 I $60,000 $1,200 Dec. 31, 2019 Interest Expense ($60,000 x 8% x 3/12) Interest Payable (To record accrued interest at year end) $1,200 Aug. 1, 2020 Notes Payable Interest Payable Interest Expense ($60,000 x 8% x 7/12) Cash (To record repayment of note and interest) $60,000 $1,200 $2,800 $64,000 Question #2: Bond Scenario 1 Face value of Bonds Coupon rate of interest Market rate of interest Interest payment frequency Bonds maturity period/Bonds life Total no. of coupon payments till maturity (5 Year x 2) $500,000 6.00% 8.00% Semi-annually 5 years 10 Semi-Annual interest payment = Face value x Coupon rate of interest/2 = $500,000 x 6%/2 = $15,000 Since, the market rate of interest is higher than the coupon rate of interest, the investor shall not be willing to pay the face value; hence these bonds shall be issued at discount. Computation of issue price of bonds Semi-annual interest payment Present value of an ordinary annuity of $1 for 10 periods at 4% Present value of Semi-annual interest payments ($15,000 x 8.11090) $15,000 8.11090 $121,664 Face value of bonds to be repaid at the time of maturity Present value of $1 for 10 periods at 4% Present value of payment made on maturity ($500,000 x 0.67556) $500,000 0.67556 $337,780 Issue price of Bonds $459,444 Issue price of bonds $459,444 Note 1: Since, the interest payment is semi-annually, hence the period shall be twice (5 years x 2), and the interest rate shall be half (8%/2) to select the present value factor. Note 2: Present value annuity factor and present value factor is rounded off upto 5 decimal points. Present value of an ordinary annuity of 1 for 10 periods at 4% can be calculated as under: Present value annuity factor (Excel formula) = PV(8%/2,5*2,-1,0) = 8.11090 Present value of 1 for 10 periods at 4% can be calculated as under: Present value factor (Excel formula) = 1/(1+8%/2)^(5*2) = 0.67556

Question #3 : Bonds Scenario 2 Credit Debit $500,000 Date 1 Accounts Mar 31, 2016 Cash Bonds Payable (To record issuance of bonds) $500,000 Dec 31, 2016 $22,500 Interest Expense ($500,000 x 6% x 9/12) Interest Payable (To record accrual of interest at year end) $22,500 Mar 31, 2017 $7,500 $22,500 Interest Expense ($500,000 x 6% x 3/12) Interest Payable Cash (To record payment of interest on coupon date) $30,000 Mar 31, 2021 Bonds Payable Interest Expense ($500,000 x 6% x 3/12) Interest Payable Cash (To record redemption of the bonds) $500,000 $7,500 $22,500 $530,000 Question #4: Bonds Scenario 3 Journal entry, if bonds are issued at premium (i.e. @ 102) Date Credit Debit $510,000 Accounts Mar 31, 2017 Cash ($500,000 x 102%) Bonds Payable Premium on Bonds payable (To record issuance of bonds at premium) $500,000 $10,000 Journal entry, if bonds are issued at discount (i.e. @ 98) Credit Date Mar 31, 2017 Accounts Cash ($500,000 x 98%) Discount on Bonds Payable Bonds Payable (To record issuance of bonds at discount) Debit $490,000 $10,000 $500,000