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Entries to Record Issuance of Bonds, Interest Accrual, and Bonds

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Hornung Electric sold $300,000, 10%, 10 yr bonds on Jan. 1, 2006. The bonds were dated Jan. 1 and paid interest on Jan 1 and July 1. The bonds were sold at 104.
Instructions:

a. Prepare the journal entry to record the issuance of the bonds on Jan. 1, 2006.
b. At Dec. 31, 2006 the balance in the Premium on bonds payable account is $10,800. Show the balance sheet presentation of accrued interest and the bond liability at Dec. 31, 2006.
c. On Jan. 1 2008 when the carrying value of the bonds was $309,600, the company redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the period has already been paid. (loss=$5,400)

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Hornung Electric sold $300,000, 10%, 10 yr bonds on Jan. 1, 2006. The bonds were dated Jan. 1 and paid interest on Jan 1 and July 1. The bonds were sold at 104.

Instructions:
a. Prepare the journal entry to record the issuance of the bonds on Jan. 1, 2006.

Cash 312,000
Bonds ...

Solution Summary

This solution is comprised of a detailed explanation to prepare the journal entry to record the issuance of the bonds on Jan. 1, 2006, show the balance sheet presentation of accrued interest and the bond liability at Dec. 31, 2006, and record the redemption of the bonds assuming that interest for the period has already been paid.

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See Also This Related BrainMass Solution

Payroll Taxes and Bond Interest Journal Entries

E10-6 According to the accountant of Ulner Inc., its payroll taxes for the week were as follows: $198.40 for FICA taxes, $19.84 for federal unemployment taxes, and $133.92 for state unemployment taxes.
Record accrual of payroll taxes.
Instructions-- Journalize the entry to record the accrual of the payroll taxes.
Payroll Tax Expense $352.16
FICA Taxes Payable $198.40
Federal Unemployment Taxes Payable $19.84
State Unemployment Taxes Payable $133.92
(To Record Payable Taxes for the week)
E10-8 Jim Thome has prepared the following list of statements about bonds.
Evaluate statements about bonds.
Instructions identify each statement above as true or false. If false, indicate how to correct the statement.
1. Bonds are a form of interest-bearing notes payable. - True
2. When seeking long-term financing, an advantage of issuing bonds over issuing common stock is that stockholder control is not affected. - True
3. When seeking long-term financing, an advantage of issuing common stock over issuing bonds is that tax savings result. - False
4. Secured bonds have specific assets of the issuer pledged as collateral for the bonds. - True
5. Secured bonds are also known as debenture bonds. - False
6. Bonds that mature in installments are called term bonds. - False
7. A conversion feature may be added to bonds to make them more attractive to bond buyers. - True
8. The rate used to determine the amount of cash interest the borrower pays is called the stated rate. - True
9. Bond prices are usually quoted as a percentage of the face value of the bond. - True
10. The present value of a bond is the value at which it should sell in the marketplace. - True
*E10-18 Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for $562,613.This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Hrabik uses the effective-interest method to amortize bond premium or discount.
(a) The issuance of the bonds.

Cash = $562,613

Discount on Bonds Payable = $37,387

Bonds Payable = $600,000

(b) The payment of interest and the discount amortization on July 1, 2011, assuming that interest was not accrued on June 30.

Interest Expense ($562,613*.05) = $28,131

Discount on Bonds Payable = $1,131

Cash ($600,000*.09*.50) = $27,000

(c) The accrual of interest and the discount amortization on December 31, 2011.

Interest Expense {($562,613+1,131)*.05} = $57,738

Discount on Bonds Payable = $1,187

Cash ($600*.09*1) = $2,700
P10-3A On May 1, 2011, Newby Corp. issued $600,000, 9%, 5-year bonds at face value. The bonds were dated May 1, 2011, and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31.
Prepare entries to record issuance of bonds, interest accrual, and bond redemption.
(d) Int. exp. = $18,000
(f) Loss = $12,000
Instructions
(a) Prepare the journal entry to record the issuance of the bonds.

Cash = $600,000

Bonds Payable = $600,000

(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2011.

Interest Expense ($600,000*.09*1.67) = $9,000

Interest Payable = $9,000

(c) Show the balance sheet presentation on December 31, 2011.

Current Liabilities:

Bond Interest Payable = $9,000

Long -Term Liabilities:

Bonds Payable (Due 2016) = $600,000

(d) Prepare the journal entry to record payment of interest on May 1, 2012, assuming no accrual of interest from January 1, 2012, to May 1, 2012.

Interest Expense ($600,000*.09*.3333333) = $18,000

Interest Payable = $9,000

Cash = $27,000

(e) Prepare the journal entry to record payment of interest on November 1, 2012.

Interest Expense ($600,000*.09*.50) = $27,000

Cash = $27,000

(f) Assume that on November 1, 2012, Newby calls the bonds at 102. Record the redemption of the bonds.

Bonds Payable = $600,000
Loss on Bond Redemption = $12,000

Cash ($600,000*1.02) = $612,000

*P10-6A On July 1, 2011, Atwater Corporation issued $2,000,000 face value, 10%, 10-year bonds at $2,271,813.This price resulted in an effective-interest rate of 8% on the bonds. Atwater uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Prepare entries to record issuance of bonds, payment of interest, and amortization of bond premium using effective-interest method.
(c) Amortization = $9,127
(d) Amortization = $9,493
(e) Amortization = $9,872
Instructions (Round all computations to the nearest dollar.)
P10-6A: On July 1, 2011, Atwater Corporation issued $2,000,000 face value, 10%, 10-year bonds at $2,271,813.This price resulted in an effective-interest rate of 8% on the bonds. Atwater uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.

(a) Prepare the journal entry to record the issuance of the bonds on July 1, 2011.

Cash = $2,271,813

Bonds Payable = $2,000,000

Premium on Bonds Payable = $271,813

(b) Prepare an amortization table through December 31, 2012 (3 interest periods) for this bond issue.

Semi-

annual

Interest

Periods

(A)

Interest

to Be

Paid (B)

Interest

Expense (C)

Premium

Amor-

tization

(A) - (B) (D)

Unamor-

tized

Premium

(D) - (C) (E)

Bond

Carrying

Value

($2,000,000 + D)

Issue date

1

2

3

$100,000

 100,000

 100,000

$90,873

 90,507

 90,128

$9,127

 9,493

 9,872 $271,813

 262,686

 253,193

 243,321 $2,271,813

 2,262,686

 2,253,193

 2,243,321
(c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2011.

Interest Expense ($2,271,813*.04) = $90,873

Premium on Bonds Payable = $9,127

Interest Payable ($2,000,000*.05) = $100,000

(d) Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2012, assuming no accrual of interest on June 30.

Interest Expense {($2,271,813-$9,127)*.04} = $90,507

Premium on Bond Payable = $9,493

Cash = $100,000

(e) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2012.

Interest Expense {($2,262,686 - $9,493)*.04} = $90,128

Premium on Bonds Payable = $9,872

Bond Interest Payable = $100,000

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