# The following is an excerpt taken from December 31, 2011, balance sheet of the Wimbledon Company:...

## Question:

The following is an excerpt taken from December 31, 2011, balance sheet of the Wimbledon Company:

The bonds have a stated interest rate of 8% and mature on January 1, 2017. Interest is paid semiannually on July 1 and January 1. The bonds are callable at 105 on any semiannual interest date.

 Current liabilities Bond interest payable $64,000 Long-term liabilities Bonds payable 1,600,000 Less: Discount on bonds payable 30,000 Carrying value$1,570,000

Required:

a. Prepare the journal entry to record the payment of bond interest on January 1, 2012. .

b. Prepare the journal entry to amortize the bond discount and pay the interest on July 1, 2012. For compound entries, if an amount box does not require an entry, leave it blank.

c. Prepare the journal entry to record the redemption of the bonds on July 1, 2012, after the interest has been paid. For compound entries, if an amount box does not require an entry, leave it blank.

d. Prepare the adjusting journal entry for December 31, 2012, assuming that the bonds were not redeemed. For compound entries, if an amount box does not require an entry, leave it blank.

e. Show how all liabilities related to the bonds would be reported on Wimbledon's balance sheet at December 31, 2012.

## Bonds:

Bonds are long-term liabilities issued by companies in order to garner capital. Bonds are defined by their principal values and their interest rates. The principal value of a bond must be repaid by the bond's maturity date while interest, as determined by the bond's stated rate, is typically paid periodically. Bonds may be issued at face value, at a premium, or at a discount, depending on the bond's interest rate in comparison to the market interest rate.

#### Part a.

Account Debit Credit Explanation
Bond Interest Payable $64,000 Remove payable Cash$64,000 Record outflow of cash to pay interest

#### Part b.

Account Debit Credit Explanation
Interest Expense $67,000 Record interest expense for period ($64,000 + $3,000) Cash$64,000 Record outflow of cash to pay interest ($1,600,000 x 8% / 2) Discount on Bonds Payable$3,000 Amortize discount based on straight-line method ($30,000 / (5 years remaining x 2 periods per year)) #### Part c. Account Debit Credit Explanation Bonds Payable$1,600,000 Remove bonds from books
Loss on Bond Redemption $107,000 Record the loss on the bond redemption ($1,680,000 + $27,000 -$1,600,000)
Discount on Bonds Payable $27,000 Remove remaining bond discount from books Cash$1,680,000 Record outflow of cash required to redeem bonds ($1,600,000 x 1.05) #### Part d. Account Debit Credit Explanation Interest Expense$67,000 Record interest expense for period ($64,000 +$3,000)
Bond Interest Payable $64,000 Record outflow of cash to be made on January 1 to pay interest ($1,600,000 x 8% / 2)
Discount on Bonds Payable $3,000 Amortize discount based on straight-line method (see calculation in part b.) #### Part e.  Long-term liabilities Bonds payable$1,600,000 Less: Discount on bonds payable 24,000 Carrying value \$1,576,000 