Saberhagen Company sold $3,500,000, 8%, 10-year bonds on January 1, 2017. The bo
ID: 2480000 • Letter: S
Question
Saberhagen Company sold $3,500,000, 8%, 10-year bonds on January 1, 2017. The bonds were dated January 1, 2017 and pay interest annually on January 1. Saberhagen Company uses the straight-line method to amortize bond premium or discount. Instructions (a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2017, assuming that the bonds sold at 104. Amortization $14,000 (b) Prepare journal entries as in part (a) assuming that the bonds sold at 98. Amortization $7,000 (c) Show balance sheet presentation for the bonds at December 31, 2017, for both the requirements in (a) and (b). Premium on bonds payable $126,000 Discount on bonds payable $63,000
Explanation / Answer
Solution:
Par Value of the bonds = $3,500,000
Coupon Rate = 8% annually
Annual Coupon Interest payable on each interest payment date = $3,500,000 x 8% = $280,000
(a) All the necessary journal entries to record the issuance of the bonds and bond interest expense for 2017, assuming that the bonds sold at 104. Amortization $14,000
Issue Price = $3,500,000 x 104% = $3,640,000
Since issue price of the bonds are higher than par value, the bonds are issued at premium.
Journal Entry on Jan 1, 2017 to record the issuance of the bonds
Date
Account Title and Explanation
Debit
Credit
Jan 1, 2017
Cash A/c Dr.
$3,640,000
To Premium on Bonds Payable
$140,000
To Bonds Payable
$3,500,000
(Being the bonds issued at Premium)
Journal Entry to record interest payment on Dec 31, 2017
Date
Account Title and Explanation
Debit
Credit
Dec 31, 2017
Interest Expenses Dr.
$266,000
Premium on Bonds Payable
$14,000
To Interest Payable to Bond Holders
$280,000
(being Interest expenses recorded)
(b) Prepare journal entries as in part (a) assuming that the bonds sold at 98. Amortization $7,000
Issue Price of the bonds = $3,500,000 x 98% = $3,430,000
Since issue price is less than par value, the bonds are issued at discount
Discount on Bonds Payable = Par Value – Issue Price = $3,500,000 - $3,430,000 = $70,000
Journal Entry on Jan 1, 2017 to record the issuance of the bonds
Date
Account Title and Explanation
Debit
Credit
Jan 1, 2017
Cash A/c Dr.
$3,430,000
Discount on Bonds Payable
$70,000
To Bonds Payable
$3,500,000
(Being the bonds issued at discount)
Journal Entry to record interest payment on Dec 31, 2017
Date
Account Title and Explanation
Debit
Credit
Dec 31, 2017
Interest Expenses Dr.
$287,000
To Discount on Bonds Payable
$7,000
To Interest Payable to Bond Holders
$280,000
(being Interest expenses recorded)
(c) the balance sheet presentation for the bonds at December 31, 2017, for both the requirements in
(a) and (b). Premium on bonds payable $126,000 Discount on bonds payable $63,000
Balance Sheet Presentation at Dec 31, 2017
(a) Premium on bonds payable $126,000
Long Term Liabilities:
Bonds Payable
$3,500,000
Add: Premium on Bonds Payable
$126,000
$3,626,000
Balance Sheet Presentation at Dec 31, 2017
(b) Discount on bonds payable $63,000
Long Term Liabilities:
Bonds Payable
$3,500,000
Less: Discount on Bonds Payable
($63,000)
$3,437,000
Date
Account Title and Explanation
Debit
Credit
Jan 1, 2017
Cash A/c Dr.
$3,640,000
To Premium on Bonds Payable
$140,000
To Bonds Payable
$3,500,000
(Being the bonds issued at Premium)
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