Wong Corporation sold $2,534,000, 7%, 5-year bonds on January 1, 2012. The bonds

Question

Wong Corporation sold $2,534,000, 7%, 5-year bonds on January 1, 2012. The bonds were dated January 1, 2012, and pay interest on January 1. Wong Corporation uses the straight-line method to amortize bond premium or discount.

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2012, assuming that the bonds sold at 104.

(b) Prepare journal entries to record the issuance of the bonds and bond interest expense for 2012, assuming that the bonds sold at 99

(c) (1) Show the balance sheet presentation for the bond issue at December 31, 2012, using the 104 selling price.

c) (2) Show the balance sheet presentation for the bond issue at December 31, 2012, using the 99 selling price.

Explanation / Answer

A) Prepare all the necessary journal entries to record the issuance of the bonds andbond interestexpense for 2012, assuming that the bonds sold at 103.
4,000,000 x 103% = 4,120,000 issue price of bonds. Bonds were sold at a premium (above face value).
Jan. 1
Dr Cash 4,120,000
Cr Bonds Payable2,534,000
Cr Premium onBonds Payable120,000

4,000,000 x 8% / 2 = $160,000 cash payment per 6 months
120,000 / 20 = $6,000 amortization of premium per 6 months.
160,000 - 6,000 = $154,000 interest expense per 6 months
July 1
Dr Bond Interest Expense154,000
Dr Premium on Bonds Payable 6,000
Cr Cash 160,000

Dec. 31
Dr Bond Interest Expense 154,000
Dr Premium on Bonds Payable 6,000
Cr Bond Interest Payable 160,000

B) Prepare journal entries as in part (a) assuming that the bonds sold at 96.
4,000,000 x 96% = 3,840,000 issue price of bonds. Bonds were sold at a discount (below face value).
Jan. 1
Dr Cash 3,840,000
Dr Discount on Bonds Payable 160,000
Cr Bonds Payable 4,000,000

4,000,000 x 8% / 2 = $160,000 cash payment per 6 months
160,000 / 20 = $8,000 amortization of discount per 6 months.
160,000 + 8,000 = $168,000 interest expense per 6 months
July 1
Dr Bond Interest Expense 168,000
Cr Cash 160,000
Cr Discount on Bonds Payable 8,000

Dec. 31
Dr Bond Interest Expense 168,000
Cr Bond Interest Payable 160,000
Cr Discount on Bonds Payable 8,000

C) Show balance sheet presentation for each bond issue at December 31, 2012.
For the first bond, under current liabilities, bond interest payable would be $160,000. Under L/T liabilites bonds payable would be shown at their carrying value (face value plus unamortized premium) 4,000,000 + 108,000 = $4,108,000

For the second bond, under current liabilities, bond interest payable would be $160,000. Under L/T liabilites bonds payable would be shown at their carrying value (face value minus unamortized discount) 4,000,000 - 144,000 = $3,856,000

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