$800,000,000 4.75% Notes due 2024 For this problem, assume the bonds were origin
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Question
$800,000,000
4.75% Notes due 2024
For this problem, assume the bonds were originally dated 7/1/17 and are due 7/1/2024. Interest payment dates are 1/1 and 7/1. ROUND ALL ANSWERS TO THE NEAREST DOLLAR! Assume that $650,000 of these bonds are sold for 93.375 on 7/1/17, to yield 5.5%.
(a) Prepare the entry to record the sale on 7/1/17:
(b) Prepare the entry required at 12/31/17:
(c) What is the 12/31/17 carrying value?
(d) What is the effect on the financial statements if the 12/31/17 adjusting entry is omitted?
(e) How much interest expense does the company report for 2017? For 2018?
(f) How much cash interest do the bondholders receive in 2017? In 2018?
(g) Prepare the entry required on 1/1/18:
(h) Prepare the entry to record the next semi-annual interest payment (and amortization), on 7/1/18:
(i) What is the effect on the financial statements of making the entry on 7/1/18?
(j) Name two liabilities (account names and amounts) that will appear on the balance sheet related to these bonds on 12/31/18:
Explanation / Answer
Solution:
(a) Entry to record the sale on 7/1/17
Date
Account Titles
Debit
Credit
7/1/2017
Cash (650,000*93.375%)
$606,937.50
Discount on Bonds Payable
$43,062.50
Bonds Payable
$650,000
b) Entry at 12/31/17
Semi Annual Interest = Par Value 650,000*stated interest rate 4.75% * ½ = $15,437.50
Interest Expenses to be recorded = Carrying Value of Bonds Payable x 5.5% * ½
= $606,937.50 x 5.5% x ½
= $16,691
Amortization of Discount on Bonds Payable = Interest Expense - Semi Annual Cash Interest = 16691 – 15437.50
= $1,253.50
Date
Account Titles
Debit
Credit
12/31/2017
Interest Expense
$16,691.00
Discount on Bonds Payable
$1,253.50
Interest Payable
$15,437.50
c) Carrying Value of Bonds on 12/31/17 = Par Value of the Bonds – Unamortized Portion of Discount on Bonds Payable
= 650,000 – (43,062.50 – 1253.50)
= $608,191
d) If the adjusting entry is omitted, the Net Income will be increased by $16,691 since the interest expenses not recorded and the the balance sheet does not show the correct carrying value of the bonds payable on 12/31/17
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Date
Account Titles
Debit
Credit
7/1/2017
Cash (650,000*93.375%)
$606,937.50
Discount on Bonds Payable
$43,062.50
Bonds Payable
$650,000
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