Question

# uthwest Corporation issued bonds with the following details: Face value: \$500,000 Interest: 8 percent per year...

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.

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

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