Question

Mastery Problem: Liabilities: Bonds Payable

SpringFit Corporation

You are an accounting intern working for SpringFit Corporation. You have recently been assigned to help one of the accountants who is doing an internal audit of the business. You will be assisting with a review of the payables issued by SpringFit Corporation. Your first task is to review the previous year’s journal entries, shown as follows:

Journal Entries, Year 1

Journal

DateDescriptionDebitCredit

Jan. 1Cash1,004,720      

   Premium on Bonds Payable58,720      

   Bonds Payable946,000      

    

Jun. 30Interest Expense18,349      

Premium on Bonds Payable2,936      

   Cash21,285      

    

Jul. 1Cash1,729,164      

Discount on Bonds Payable70,836      

   Bonds Payable1,800,000      

    

Dec. 31Interest Expense18,349      

Premium on Bonds Payable2,936      

   Cash21,285      

    

31Interest Expense37,403      

   Discount on Bonds Payable5,903      

   Cash31,500      

    

31Retained Earnings74,101      

   Interest Expense74,101      

Bonds Payable

Review the journal entries on the SpringFit Corporation panel, then answer the following questions.

1. Assuming that no bonds had been issued prior to Year 1, how many different bonds appear in the journal entries for this year?

2. Which entry shows bonds issued at a contract rate lower than the market rate of interest? Choose the date.

3. How much interest was paid during the year on the bonds in question (2)?

$

4. What is the carrying amount of the bonds in question (2) at the end of the year?

$

5. Which entry shows bonds that sold for more than their face amount? Choose the date.

6. How much interest was paid during the year on the bonds in question (5)?

$

7. Assuming that straight-line amortization is used for the bonds in question (5), what is the bond life?

8. What is the carrying value of the bonds in question (5) at the end of the year?

$

Journal Entries, Year 2

You have been asked to continue your work on the SpringFit Corporation audit. The journal entries for the current year are shown as follows:

Journal

DateDescriptionDebitCredit

Jun. 30Interest Expense18,349         

Premium on Bonds Payable2,936         

   Cash21,285         

    

30Interest Expense37,403         

   Discount on Bonds Payable5,903         

   Cash31,500         

    

30Bonds Payable1,800,000         

   Gain on Redemption of Bonds41,000         

   Discount on Bonds Payable59,030         

   Cash1,699,970         

    

Dec. 31Interest Expense18,349         

Premium on Bonds Payable2,936         

   Cash21,285         

    

31Retained Earnings74,101         

   Interest Expense74,101         

    

31Bonds Payable473,000         

Premium on Bonds Payable23,488         

Loss on Redemption of Bonds20,600         

   Cash517,088         

Final Questions

Considering the journal entries for both years, answer the following questions.

1. Were the bonds in the entry on Dec. 31 of Year 2 redeemed at maturity?

2. You suspect there is an error in one of the bond redemption entries. Assuming that the amounts are correct, which entry is questionable?

  Why?  

3. Why do some bonds sell below face value?

4. Which of the following items are amortized?

a. Bonds

b. Discounts

c. Future cash receipts

d. Redemption amount

e. Premiums

f. Contract rate of interest

g. It depends on the face value of the bond

h. Interest expenses

Answer 1

Part A
1. Two (2) types of bonds appear

2. Jul 1, since bonds are issued at discount

3. $31500 i.e. on Dec 31

4. Carrying Amount of Bond = $1729164+5903 = $1735067

5. Jan 1, since bonds are issued at premium

6. $21285 x 2 = $42570 i.e. on Jun-30 and Dec-31

7. $58720/2936 = 20 periods i.e. 10 years

8. Carrying Value of Bonds = $1004720-2936*2 = $998848

Part B
1. No, bonds were redeemed prior to maturity

2. Debits and credits are not clear for entries as they are not in proper format, so could not be answered.

3. Some bonds are issued at less than face value, since interest offered on some bonds is lower than market rate of interest.

4. Discount and Premium are amortized