Grocery Corporation received $307,078 for 14.00 percent bonds issued on January
ID: 2470386 • Letter: G
Question
Grocery Corporation received $307,078 for 14.00 percent bonds issued on January 1, 2015, at a market interest rate of 11.00 percent. The bonds had a total face value of $256,000, stated that interest would be paid each December 31, and stated that they mature in 10 years. Required: Complete the following table for each account by indicating (a) whether it is reported on the Balance Sheet (B/S) or Income Statement (I/S); (b) the dollar amount by which the account increases, decreases, or does not change (0) when Grocery Corporation issued the bonds; and (c) the direction of change in the account [increase, decrease, or no change] when Grocery Corporation records the interest payment on December 31.Explanation / Answer
a. bonds payable is a liability and is shown in the balance sheet. The liability is accounted for when the bonds are issued.
discount on bonds payable is a contra liability account. This account is registered when bonds are issued for less than the bond's face. As it is a liability account it is shown in balance sheet.
Interest expense is shown in Income statement as an expense.
Premium on bonds payable is a liability account and is the opposite of the discount on bonds payable account. It is also shown on the balance sheet.
b. when bonds are issued, new debt is taken and so the liability will increase. This amount will also increase. The amount of increase is the face value of bonds i.e $256,000.
the amount of discount on bonds payable will not change as bonds are issued at premium.
Interest expenses are paid on december 31st and the bonds were issued much before in the month of January. So this account will also not change.
Premium on bonds payable will increase as bonds are issued at premium. The amount will be: 307078 - 256000 = $51,078.
c. For interest payments the bonds payable account and discount on bonds payable account will not be affected.
Interest expenses will increase as it will be debited.
The premium on bonds payable account will decrease. This is due to the fact that the premium amount will be amortized and the premium on bonds payable account will be debited when interests are paid.
Account a b c Bonds Payable B/S 256000 (increase) No change Discount on bonds payable B/S 0 No change Interest expense I/S 0 Increase Premium on bonds payable B/S 51078 (increase) DecreaseRelated Questions
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