Long-Term Liabilities
E14-3 (Entries for Bond Transactions)
On January 1, 2017, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is
payable quarterly on April 1, July 1, October 1, and January 1.
Instructions
Prepare journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1.
(c) The accrual of interest on December 31.
Solution
1. Simon Company:
1/1/17
(a) Cash................................................................................................................
200,000
Bonds Payable.................................................................................... 200,000
7/1/17
(b) Interest Expense.............................................................................................
4,500
($200,000 X 9% X 3/12)
Cash....................................................................................................
4,500
12/31/17
(c) Interest Expense.............................................................................................
4,500
Interest Payable..................................................................................
4,500
E14-8 (Determine Proper Amounts in Account Balances)
George Gershwin sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds
pay interest on July 1 and January 1.
Instructions
Determine the amount of interest expense to be reported on July 1, 2017, and December 31,
2017. Assume straight-line method.
Solution
(a) Interest paid for the period from January 1
(July 1) to June 30 (December 31), 2017;
$2,000,000 X 10% X 6/12 $100,000
Less: Premium amortization for the period from
January 1 (July 1) to June 30 (December 31), 2017
[($2,000,000 X 1.04) – $2,000,000] ÷ 10 X 6/12 4,000
Interest expense to be recorded on July 1
(December 31), 2017 $ 96,000
Exercise 14-2
Moss issues bonds with a par value of $90,000 on January 1, 2011. The bonds’ annual contract
rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds mature in
three years. The annual market rate at the date of issuance is 10%, and the bonds are sold for
$85,431. Assume straight-line method.
Instructions
1. What is the amount of the discount on these bonds at issuance?
2. How much total bond interest expense will be recognized over the life of these bonds?
Solution
1. Discount = Par value - Issue price = $90,000 - $85,431 = $4,569
2.
Six payments of $3,600.................................. $ 21,600
Plus discount.................................................. 4,569
Total bond interest expense........................... $ 26,169
Brief Exercise 14-6
On January 1, 2017, JWS Co. issued $600,000 of 7% bonds, due in 10 years. The bonds were
issued for $559,224, and pay interest each July 1 and January 1. The company uses the effective-
interest rate method.
Instructions
Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest
payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.
Solution
(a) Cash................................................................................................................559,224
Discount on Bonds Payable........................................................................... 40,776
Bonds Payable.................................................................................... 600,000
(b) Interest Expense ($559,224 X 8% X 6/12).................................................... 22,369
Cash ($600,000 X 7% X 6/12)........................................................... 21,000
Discount on Bonds Payable............................................................... 1,369
(c) Interest Expense ($560,593* X 8% X 6/12)..................................................22,424
Interest Payable.................................................................................. 21,000
Discount on Bonds Payable............................................................... 1,424
*($559,224 + $1,369)
Practice Problem
On January 1, 2017, Reymont Co. issued 9% bonds with a face value of $500,000 for $469,280
with an effective interest rate of 10%. The bonds are dated January 1, 2017, and pay interest
annually every January 1.
Instructions
What amount is reported as bond discount on the issue date? Prepare the journal entry to record
interest expense on December 31, 2017.
Solution
Par value of bonds $500,000
Issue price (469,280)
Bond discount on issue late $30,720
December 31, 2017
Interest Expense……………………… 46,928
Discount on Bonds Payable………………… 1,928
Interest Payable…………………………….. 45,000
