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Mod 8(c) - CH 8 EXERCISES/PROBLEMS (68 pts)

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Bond Premium; Bonds payable Transactions

Beaufort Vaults Corporation produces and sells burial vaults. On July 1, 20Y3, Beaufort Vaults Corporation issued $25,000,000 of 10-year, 8% bonds at par. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Instructions:

1. Illustrate the effects of the issuance of the bonds on July 1, 20Y3, on the accounts and financial statements. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows	Balance Sheet
	Assets	=	Liabilities	+	Stockholders' Equity
		=		+
July 1.
Statement of Cash Flows						Income Statement

2. Illustrate the effects of the first semiannual interest payment on December 31, 20Y3, on the accounts and financial statements. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows	Balance Sheet
	Assets	=	Liabilities	+	Stockholders' Equity
		=		+
Dec. 31.
Statement of Cash Flows						Income Statement

3. Illustrate the effects of the payment of the face value of bonds at maturity on the accounts and financial statements. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows	Balance Sheet
	Assets	=	Liabilities	+	Stockholders' Equity
		=		+
June 30.
Statement of Cash Flows						Income Statement

4. The less is called a premium on Bonds payable; the amortization of a discount Interest expense, and the amortization of a premium Interest expense.

3 more Check My Work uses remaining.

Answer 1

(1).

Date	Balance Sheet					Income Statement			Statement of Cash flow
	Assets	=	Liabilities	+	Stockholders’ equity	Revenues	Expenses	Net income
July 1	Cash $25000000		Bonds $25000000		No effect	No effect	No effect	No effect	$25000000 (FA)

Explanation;

1. Issue of bonds result into cash that is why it will improve cash balance but liabilities also. No effect on income statement. Statement of cash flow also affected due to cash inflows of $25000000 from financing activities.

(2).

Date	Balance Sheet					Income Statement			Statement of Cash flow
	Assets	=	Liabilities	+	Stockholders’ equity	Revenues	Expenses	Net income
Dec. 31	Cash ($1000000)		No effect		($1000000)	No effect	($1000000)	($1000000)	$1000000 (OA)

Explanation;

1. Interest will be ($25000000 * .08 * 6 / 12) = $1000000

2. Interest payment will reduce cash balance, it will reduce net income in the income statement and ultimately it will reduce reatined earnings thus stockholders’ equity will be reduced. It is cash outflows from operting activities.

(3).

Date	Balance Sheet					Income Statement			Statement of Cash flow
	Assets	=	Liabilities	+	Stockholders’ equity	Revenues	Expenses	Net income
June. 30	Cash ($25000000)		($25000000)		No effect	No effect	No effect	No effect	$25000000 (FA)

Explanation;

1. Repayment of bonds money on maturity will reduce cash balance, it will also reduce liabilities. It will also result into outflow of cash under financing activities.

(4).

When market rate is more than interest rate on bonds then bonds issued will be known as bonds issued at discount. When market rate is less than interest rate on bonds then bonds issued will be known as bonds issued at premium.