Question

uthwest Corporation issued bonds with the following details:

Face value: $500,000

Interest: 8 percent per year payable each December 31

Terms: Bonds dated January 1, 2018, due five years from that date

The annual accounting period ends December 31. The bonds were issued at 105 on January 1, 2012, when the market interest rate was 8 percent. Assume the company uses straight-line amortization and adjusts for any rounding errors when recording interest expense in the final year.

Required 1: Compute the cash received from the bond issuance in dollars. TIP: The issue price typically is quoted at a percentage of face value.

Required: 2&3. Prepare the journal entry to record the issuance of the bonds and the payment of interest on December 31, 2018 and 2019.

Required 4a: How much interest expense would be reported on the income statements for 2018 and 2019.

Required 4b: Compute the bond value which should be reported on the balance sheets at December 31, 2018 and 2019.

Answer 1

1) Cash received from the bond issuance = 500000*105/100 = $525000

b) Journal entry

Date	account and explanation	debit	credit
Jan 1,2018	cash	525000
	Bonds payable		500000
	Premium on bonds payable		25000
	(To record bond issue)
Dec 31,2018	Interest expense	35000
	Premium on bonds payable (25000/5)	5000
	cash (500000*8%)		40000
	(To reccord interest)
Dec 31,2019	Interest expense	35000
	Premium on bonds payable	5000
	Cash		40000
	(To record interest)

4a) Interest expense for 2018 = $35000

Interest expense for 2019 = $35000

4b) Bond value on balance sheet

	Dec 31,2018	Dec 31,2019
Bonds payable	500000	500000
Add: Premium on bonds payable	(25000-5000) = 20000	(20000-5000) = 15000
Carrying value	520000	515000