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Chapter 14 - Long-Term Liabilities: Bonds and Notes – Practice Exercises # 2

Question 1:
A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000.  Journalize the
redemption of the bonds.
ANSWER:  Bonds Payable 500,000  
          Gain on Redemption of Bonds   5,000
          Discount on Bonds Payable   20,000
          Cash   475,000

Question 2:
(a)   Prepare the journal entry to issue $500,000 bonds that sold for $490,000.
(b)   Prepare the journal entry to issue $500,000 bonds that sold for $515,000.
ANSWER:  (a)
Cash 490,000  
Discount on Bonds Payable 10,000  
       Bonds Payable   500,000
(b)
Cash 515,000  
       Premium on Bonds Payable   15,000
       Bonds Payable   500,000

Question 3:
Brubeck Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest payable on May 1 and
November 1.  The fiscal year of the company is the calendar year.  Journalize the entries to record the following selected
transactions for the current year:

May   1 Issued the bonds for cash at their face amount.

Nov.   1 Paid the interest on the bonds.
Dec. 31 Recorded accrued interest for two months.
ANSWER:  May    1 Cash 10,000,000  
      Bonds Payable   10,000,000
       
Nov.   1 Interest Expense 400,000  
      Cash   400,000
       
Dec. 31 Interest Expense 133,333  
      Interest Payable   133,333

Question 4:
On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable semiannually, were
sold for $1,225,000.  Present entries to record the following transactions for the current fiscal year:

(a) Issuance of the bonds.

(b) First semiannual interest payment (record as separate entry from discount amortization).
(c) Amortization of bond discount for the year, using the straight-line method of amortization.
ANSWER:   (a)
Cash 1,225,000  
Discount on Bonds Payable 275,000  
    Bonds Payable   1,500,000
(b)
Interest Expense 60,000  
    Cash   60,000
(c)
Interest Expense 27,500  
    Discount on Bonds Payable   27,500

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Student Name: Section:
Student Number: Date:

Question 5:
On the first day of the current fiscal year, $2,000,000 of 10-year, 7% bonds, with interest payable annually, were sold for
$2,125,000.  Present entries to record the following transactions for the current fiscal year:

(a) Issuance of the bonds.

(b) First annual interest payment (record as separate entry from premium amortization).
(c) Amortization of bond premium for the year, using the straight-line method of amortization.
ANSWER:  (a)
Cash 2,125,000  
    Premium on Bonds Payable   125,000
    Bond Payable   2,000,000
(b)
Interest Expense 140,000  
    Cash   140,000
(c)
Premium on Bonds Payable 12,500  
    Interest Expense   12,500

Question 6:
On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000.  Interest is payable
semiannually on February 1 and August 1.  Present the entries to record the following transactions for the current year:

(a) Issuance of the bonds.

(b) Accrual of interest and amortization of bond discount for the first year, on December 31, using the
straight-line method. Round to the nearest dollar when necessary.
ANSWER:  (a)
Cash 1,225,000  
Discount on Bonds Payable 75,000  
    Bonds Payable   1,300,000
(b)
Interest Expense 48,750  
    Interest Payable   48,750
     
Interest Expense 1,563  
    Discount on Bonds Payable   1,563

Question 7:
On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable
semiannually.  Orange Inc. purchased the bonds on the issue date for the issue price.  Prepare entries to record the following
transactions for the current fiscal year:

(a) Issuance of the bonds.

(b) Second semiannual interest payment.
(c) Amortization of bond premium for the first year, using the straight-line method of amortization.
ANSWER:  (a)
Cash 1,050,000  
            Premium on Bonds Payable   50,000
            Bonds Payable   1,000,000
(b)
Interest Expense 35,000  
            Cash   35,000
(c)
Premium on Bonds Payable 5,000  
            Interest Expense   5,000

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Student Name: Section:
Student Number: Date:
Question 8:
Present entries to record the selected transactions described below.

(a) Issued $2,750,000 of 10-year, 8% bonds at 97.

(b) Amortized bond discount for a full year, using the straight-line method.
At the end of the third year, called bonds at 98.  The bonds were carried at $2,692,250 at the time
(c)
of the redemption.
ANSWER:  (a)
Cash 2,667,500  
Discount on Bonds Payable 82,500  
    Bonds Payable   2,750,000
(b)
Interest Expense 8,250  
    Discount on Bonds Payable   8,250
(c)
Bonds Payable 2,750,000  
Loss on Redemption of Bonds 2,750  
    Discount on Bonds Payable   57,750
    Cash   2,695,000

Question 9:
A company issued $1,000,000 of 30-year, 8% callable bonds on April 1, with interest payable on April 1 and October 1.  The fiscal
year of the company is the calendar year.  Journalize the entries to record the following selected transactions:

Year 1  
Apr. 1 Issued the bonds for cash at their face amount.
Oct. 1 Paid the interest on the bonds.
   
Year 3  
Oct. 1 Called the bond issue at 104, the rate provided in the bond indenture.  (Omit entry for payment of interest.)
ANSWER:  Year 1      
Apr. 1 Cash 1,000,000  
       Bonds Payable   1,000,000
       
Oct. 1 Interest Expense 40,000  
       Cash   40,000
       
Year 3      
Oct. 1 Bonds Payable 1,000,000  
  Loss on Redemption of Bonds 40,000  
       Cash   1,040,000

Question 10:
Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December
31.  The fiscal year of the company is the calendar year.  Journalize the entries to record the following selected transactions:

Year 1  
July   1 Issued the bonds for cash at their face amount.
Dec. 31 Paid the interest on the bonds.
   
Year 5  
Dec. 31 Called the bond issue at 97, the rate provided in the bond indenture.  (Omit entry for
payment of interest.)

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Student Name: Section:
Student Number: Date:
ANSWER:  Year 1      
July   1 Cash 2,000,000  
      Bonds Payable   2,000,000
       
Dec. 31 Interest Expense 90,000  
      Cash   90,000
       
Year 5      
Dec. 31 Bonds Payable 2,000,000  
      Gain on Redemption of Bonds   60,000
      Cash   1,940,000

Question 11:
On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000.  Present entries to record
the following transactions:

(a) Issuance of bonds.

Payment of first semiannual interest on December 31 (record separate entry from premium
(b)
amortization).
(c) Amortization by straight-line method of bond premium on December 31.
ANSWER:  (a) Cash 2,580,000  
      Premium on Bonds Payable   80,000
      Bonds Payable   2,500,000
       
(b) Interest Expense 100,000  
      Cash   100,000
       
(c) Premium on Bonds Payable 4,000  
      Interest Expense   4,000

Question 12:
Calculate the total amount of interest expense over the life of the bonds for the following independent situations.

(a) $100,000 face value, 10%, 10-year bonds issued at 101

(b) $240,000 face value, 5%, five-year bonds issued at 100
(c) $300,000 face value, 9%, six-year bonds issued at 98

ANSWER:  (a) $100,000 × 0.01 = $1,000 premium

    $100,000 × 0.10 = $10,000 annual cash payment
    $10,000 × 10 years = $100,000
    $100,000 – $1,000 = $99,000 total interest expense

(b) $240,000 × 0.05 = $12,000 annual cash payment

    $12,000 × 5 years = $60,000 total interest expense

(c) $300,000 × 0.02 = $6,000 discount

    $300,000 × 0.09 = $27,000 annual cash payment
    $27,000 × 6 years = $162,000
    $162,000 + $6,000 = $168,000 total interest expense