Cupola Fan Corporation issued 12%, $590,000, 10-year bonds for $556,000 on June
ID: 2423614 • Letter: C
Question
Cupola Fan Corporation issued 12%, $590,000, 10-year bonds for $556,000 on June 30, 2016. Debt issue costs were $3,400. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2017), the corporation exercised its call privilege and retired the bonds for $566,000. The corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs.
Prepare the journal entry to record the issuance of the bonds, the payment of interest and amortization of debt issue costs on December 31, 2016 and June 30, 2017 according to IFRS. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Q : Record general journal
1. Record the issuance of the bonds.
2. Record the payment of interest.
3. Record the amortization of debt issue costs.
4. Record the payment of interest.
Required:Explanation / Answer
Answer:
First of all we need to know the treatment of related terms associated with the Bond Issuance.
Bond Issue Cost or Debt Issue Cost --- It is treated as long term assets and shown in balance sheet under the classification of "other assets". These costs are amortized over the life of bond i.e. charged as expense on the income statement over the life of bond.
Discount on Issue of Bond -- When the issue price of bonds is below then the face value. Discount on Issue of Bonds are amortized over the life of bond.
Here in the question,
Face Value of Bond = $590,000
Issue Price of Bonds Payable = $556,000
Discount on Issue of Bond = Face Value - Issue Price = $590,000 - $556,000 = $34,000
Bond Issue Cost = $3,400
Cash Interest to be paid to each bond holders = $590,000 x 12% x ½ = $35,400
These both Bond Issue Cost and Discount on Bonds Payable is amortized over the life of bond.
Amount to be amortized with each payment of cash interest to bondholders
Amount of amortization Discount on Bonds Payable = $34,000 / 10 = $3,400
Amount to be amortized with respect to Bond Issue Costs = $3,400 / 10 = $340
1. Record the issuance of the bonds. (June 30, 2016)
Debit Amount
Credit Amount
Cash or Bank A/c (Issue Price – Issue Cost) Dr.
$552,600
Discount on Bonds Payable Dr.
$34,000
To Bonds Payable
$590,000
To Bond Issue Cost
$3,400
(being bonds are issued at discount)
2. Record the payment of interest. (Dec 31, 2016)
Debit Amount
Credit Amount
Interest Expenses Dr.
$39,140
To Discount on Bonds Payable
$3,400
To Bond Issue Cost
$340
To Cash Interest
$35,400
(Being Cash interest and interest expenses recorded)
3. Record the amortization of debt issue costs. (June 30, 2017)
Bond Issue Expenses Dr. (P&L A/c) $340
To Bond Issue Cost (B/S) $340
4. Record the payment of interest. (June 30, 2017)
Interest Expenses Dr. $38,800
To Discount on Bonds Payable $3,400
To Cash $35,400
Debit Amount
Credit Amount
Cash or Bank A/c (Issue Price – Issue Cost) Dr.
$552,600
Discount on Bonds Payable Dr.
$34,000
To Bonds Payable
$590,000
To Bond Issue Cost
$3,400
(being bonds are issued at discount)
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