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Wishful Thinking (WT) School of Management is building a new facility on a piece of donated land....

Question:

Wishful Thinking (WT) School of Management is building a new facility on a piece of donated land. It received a generous cash donation from a local business to support the project and now needs to borrow an additional $12,000,000 to complete the project. Therefore WT School of Management issued $12,000,000 of 7.00% 8-year bonds. These bonds were issued on January 1, 2015, and pay interest annually on January 1. The bond yield is 9.00%. WT School of Management incurred $480,000 in bond issue costs related to the bond sale.

(a) Prepare the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2015.

(b) Prepare a bond amortization schedule up to and including January 1, 2019, using the effective interest method.

Date Interest Paid interest expense dis./ prem amortization bond carrying.

1/1/15

1/1/16

1/1/17

1/1/18

1/1/19

(c) Assume that on July 1, 2018, the WT School of Management retires 60% of the bonds at a cost of $7,200,000 plus accrued interest. Prepare journal entries to record this retirement.

Bond Payable:

Bond payable with a stated interest rate is issued to raise long-term finance from market. Bond may be issued at discount or premium. The discount or premium on issued bond payable is amortized over the life of bond payable.

Answer and Explanation:

(a) Prepare journal entry for recording bond issuance and bond issuance expense as follows: -

Journal Entry
Date Particulars Debit Credit
1/01/2015 Cash ($12,000,000 x 0.501 + $12,000,000 x 7% x 5.53) $10,671,640
Discount on issue of Bond Payable ($12,000,000 - $10,671,640) $1,328,360
7% Bond Payable $12,000,000
1/01/2015 Bond Issue Expense $480,000
Cash $480,000

(b) Prepare discount amortization schedule as follows: -

Bond Payable Discount Amortization Schedule
Date Cash Interest ($12,000,000 x 7%) Interest Expense (b = d x 9%) Increase in carrying amount (c = b - a) Carrying amount of Note (d = d + c)
1/01/2015 $10,671,640
31/12/2015 $840,000 $960,448 $120,448 $10,792,088
31/12/2016 $840,000 $971,288 $131,288 $10,923,375
31/12/2017 $840,000 $983,104 $143,104 $11,066,479
31/12/2018 $840,000 $995,983 $155,983 $11,222,462
31/12/2020 $840,000 $1,010,022 $170,022 $11,392,484
31/12/2021 $840,000 $1,025,324 $185,324 $11,577,808
31/12/2022 $840,000 $1,042,003 $202,003 $11,779,810
31/12/2023 $840,000 $1,060,183 $220,183 $11,999,993

(c) Record journal entry for retirement of bond payable as follows: -

Journal Entry
Date Particulars Debit Credit
1/01/2015 7% Bond Payable $14,542,406
Discount on issue of Bond Payable $2,542,406
Cash $7,200,000
1/01/2015 Bond Issue Expense ($480,000/6 x 4.5 x 60%) $216,000
Profit and Loss Account $216,000


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