Question

Describing bonds, journalizing transactions for bonds payable using the straight-line amortization method, and journalizing transactions for a mortgage payable

This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. Canyon Canoe Company plans to raise the capital by issuing \(210,000 of 7.5%, six-year bonds on January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives \)208,476 when the bonds are issued.

The company also issues a mortgage payable for \(450,000 on January 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of \)45,000 plus interest for ten years, payable on December 31. The mortgage interest rate is 8%.

Requirements

1. Will the bonds issue at face value, a premium, or a discount?

2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations.

a. Cash received from the bond issue.

b. Cash received from the mortgage payable.

c. Semiannual bond interest payments for 2020. Amortize the premium or discount using the straight-line amortization method.

d. Payment on the mortgage payable for 2020.

3. Calculate the total interest expense incurred in 2020.

Short answer

The amount of the interest expense for the year 2020 is $51,170.

Step-by-step solution

Definition of bonds

The bonds are a long-term liability that the company issues to fulfil the need for a large amount of money.

Issue the bond at face value, a premium, or a discount

The bonds are issued at a discount because the amount received on the issue is less than the face value of the bonds. Hence, the bonds are issued at a discount.

Cash received on the issue

a. On the issue of the bonds, the cash received by the company is $208,476.

b. On the issue of the mortgage payable, the cash received by the company is $450,000.

c. Semi-annual interest payment

$\begin{array}{c}\mathbf{Semi}\mathbf{-}\mathbf{annual}\mathbf{Interest}\mathbf{Payment}\mathbf{=}\mathbf{Face}\mathbf{Value}\mathbf{of}\mathbf{Bonds}\mathbf{\times }\mathbf{Interest}\mathbf{Rate}\mathbf{\times }\mathbf{TIme}\mathbf{Period}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{210}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{7}\mathbf{.}\mathbf{5}\mathbf{\%}\mathbf{\times }\mathbf{6}}{12}\\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{875}\end{array}$

The amount of semi-annual interest is $7,875.

$\begin{array}{c}\mathbf{Discount}\mathbf{Amortization}\mathbf{=}\frac{\mathbf{Amount}\mathbf{of}\mathbf{discount}}{\mathbf{No}\mathbf{.}\mathbf{of}\mathbf{periods}}\\ \mathbf{=}\frac{\$1,524}{12}\\ =\$127\end{array}$

At the end of each period, a $127 discount is amortized

d. Payment on mortgage Payable= $45,000

$\begin{array}{c}\mathbf{Annual}\mathbf{Interest}\mathbf{Payment}\mathbf{=}\mathbf{FaceValue}\mathbf{of}\mathbf{Bonds}\mathbf{\times }\mathbf{Interest}\mathbf{Rate}\mathbf{\times }\mathbf{TIme}\mathbf{Period}\\ \mathbf{=}\mathbf{\$}\mathbf{450}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\mathbf{1}\\ \mathbf{=}\mathbf{\$}\mathbf{36}\mathbf{,}\mathbf{000}\end{array}$

Date	Particulars	Debit	Credit
January 2, 2020	Cash	208,476
	Discount on Bonds Payable	$1,524
	7.5% Bonds Payable		$210,000
	(Being entry for the issue of bonds)
January 2, 2020	Cash	$450,000
	8% Mortgage Payable		$450,000
	(Being entry for the issue of bonds payable)
Jun 30, 2020	7.5% Bonds Payable	$8,109
	Discount on Bonds Payable		$1,524
	Cash		$7,585
	(Being for the payment of discount)
December 31, 2020	7.5% Bonds Payable	$8,109
	Discount on Bonds Payable		$1,524
	Cash		$7,585
	(Being for the payment of discount)
December 31, 2020	8% Mortgage Payable	$9,000
	Interest Expense	$36,000
	Cash		$45,000
	(Being entry for the payment of mortgage payable)

Calculation of interest expense

$\begin{array}{c}\mathbf{Interest}\mathbf{Expense}\mathbf{=}\mathbf{Payment}\mathbf{on}\mathbf{june}\mathbf{30}\mathbf{+}\mathbf{Payment}\mathbf{on}\mathbf{December}\mathbf{31}\mathbf{+}\mathbf{Payament}\mathbf{of}\mathbf{mortgage}\mathbf{interest}\\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{585}\mathbf{+}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{585}\mathbf{+}\mathbf{\$}\mathbf{36}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{51}\mathbf{,}\mathbf{170}\end{array}$