Chapter 12: Q14RQ (page 655)
What is the journal entry to retire bonds at maturity?
Bond payable is debited and cash credited to record the retirement of bond.
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Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018.
6. Journalize the issuance of the bonds payable on January 1, 2018.
7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line
amortization method) on July 1, 2018.
8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the
first semiannual interest and amortization of the bond discount or premium.
Bill and Edna had been married two years and had just reached the point where they
had enough savings to start investing. Bill’s uncle Dave told them that he had recently
inherited some very rare railroad bonds from his grandmother’s estate. He wanted
to help Bill and Edna get a start in the world and would sell them 50 of the bonds at
\(100 each. The bonds were dated 1873, beautifully engraved, showing a face value of
\)1,000 each. Uncle Dave pointed out that “United States of America” was printed
prominently at the top and that the U.S. government had established a sinking fund to
retire the old railroad bonds. A sinking fund is a fund established for the purpose of
repaying the debt. It allows the organization (the U.S. government, in this example)
to set aside money over time to retire the bonds. All Bill and Edna needed to do was
hold on to them until the government contacted them, and they would eventually get
the full \(1,000 for each bond. Bill and Edna were overjoyed—until a year later when
they saw the exact same bonds for sale at a coin and stamp shop priced as “collectors’
items” for \)9.95 each!
Requirements
1. If a company goes bankrupt, what happens to the bonds it issued and the investorswho bought the bonds?
2. When investing in bonds, how can you tell whether the bond issue is a legitimatetransaction?
3. Is there a way to determine the relative risk of corporate bonds?
Determining the present value of bond at issuance
On December 31, 2018, when the market interest rate is 12%, Benson Realty issues
$600,000 of 9.25%, 10-year bonds payable. The bonds pay interest semi annually.
Determine the present value of the bonds at issuance.
What is an annuity?
Accounting for long-term notes payable transactions
Consider the following note payable transactions of Caleb Video Productions.
2018
Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% note
payable. The note requires annual principal payments of \)16,000 plus
interest each October 1.
Dec. 31 Accrued interest on the note payable.
2019
Oct. 1 Paid the first installment on the note.
Dec. 31 Accrued interest on the note payable.
Requirements
1. Journalize the transactions for the company.
2. Considering the given transactions only, what are Caleb Video Productions’ total
liabilities on December 31, 2019?
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