Accounting 2 – Ch.

15 Bonds

Long-term liabilities are obligations that are expected to be paid after one year.

Bonds are a form of interest-bearing notes payable.

 Bond Face value or Par Value usually $1,000.

 Attract many investors.

 Corporation issuing bonds is borrowing money.

 Person who buys the bonds (the bondholder) is investing in bonds.

 Interest payments usually made semiannually.

Issuing Bonds at Face Value

Illustration: On January 1, 2017, Candlestick, Inc. issues $100,000, five-year, 10% bonds at 100 (100%
of face value). The entry to record the sale is:

Jan. 1 Cash 100,000

Bonds Payable 100,000

Assume that interest is payable annually on January 1. At December 31, 2017, Candlestick
recognizes interest expense incurred with the following entry.

Dec. 31 Interest Expense 10,000

Interest Payable 10,000

Jan. 1 Interest Payable 10,000

Cash 10,000

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Accounting 2 – Ch. 15 Bonds

Issuing Bonds at a Discount

Illustration: On January 1, 2017, Candlestick, Inc. sells $100,000, five-year, 10% bonds for
$98,000 (98% of face value). Interest is payable annually January 1. The entry to record the
issuance is:

Jan. 1 Cash 98,000

2017 Discount on Bonds Payable 2,000

Bonds Payable 100,000

Dec 31 Interest Expense 10,400

2017 Interest Payable (10% X 100,000) 10,000
Discount on Bonds Payable (2,000 / 5) 400

Jan. 1 Interest Payable 10,000

2018 Cash 10,000

Issuing Bonds at a Premium

Illustration: On January 1, 2017, Candlestick, Inc. sells $100,000, five-year, 10% bonds for
$102,000 (102% of face value). Interest is payable annually January 1. The entry to record the
issuance is:

Jan. 1 Cash 102,000

Bonds Payable 100,000

Premium on Bonds Payable 2,000

Dec 31 Interest Expense 9,600

2017 Premium on Bonds Payable (2,000 / 5) 400
Interest Payable (10% X 100,000) 10,000

Jan. 1 Interest Payable 10,000

2018 Cash 10,000

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Accounting 2 – Ch. 15 Bonds

Review Problems

Problem (1):
On January 1, 2009, Denton Corporation issued $6,00,000, 9%, 5-year bonds dated
January 1, 2009, at face. The bonds pay semi-annual interest on January 1 and July 1. The company
has a December 31, year end.

Required:
Prepare the journal entries to record the following:
1. The issuance of bonds on January 1, 1009.
2. The payment of interest on July 1, 2009.
3. The accrual of interest on December 31, 2009.
4. The payment of interest on January 1, 2010.

Problem (2):
On January 1, 2008, Trent Corporation issued $4,000,000, 8%, 5-year bonds dated January
1, 2008, at 96. The bonds pay semi-annual interest on January 1 and July 1. The company uses the
straight-line method of amortization and has a December 31, year end.

Required:
Prepare the journal entries to record the transactions on the following dates:
1. The issuance of bonds on January 1, 2008.
2. The payment of interest and the discount (or premium) amortization on July
1, 2008.
3. The accrual of interest and the discount amortization on December 31, 2008.
4. The payment of interest on January 1, 2009.

Problem (3):
On January 1, 2009, Western Manufacturing Corporation issued $2,000,000, 10%, 4-year
bonds dated January 1, 2009, at 103. The bonds pay semi-annual interest on January 1 and July 1.
The company uses the straight-line method of amortization and has a December 31, year end.

Required:
Prepare the journal entries to record the following:
1. The issuance of bonds on January 1, 1009.
2. The payment of interest and the discount (or premium) amortization on July
1, 2009.
3. The accrual of interest and the discount (or premium) amortization on
December 31, 2009.
4. The payment of interest on January 1, 2010.

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Accounting 2 – Ch. 15 Bonds

Ch 15 Review Problems Answers

Problem 1
Jan 1 Cash 6,000,000
2009 Bonds Payable 6,000,000
July 1 Interest Expense (9% X 6,000,000 / 2) 270,000
2009 Cash 270,000
Dec 31 Interest Expense (9% X 6,000,000 / 2) 270,000
2009 Interest Payable 270,000
Jan 1 Interest Payable 270,000
2010 Cash 270,000

Problem 2

- At 96 means at a discount of 4%.

- Discount amortization is 5 years X 2 times per year = 10 times = 160,000 / 10 = 16,000

Jan 1 Cash (4,000,000 X 96%) 3,840,000

2008 Discount on Bonds Payable 160,000
Bonds Payable 4,000,000
July 1 Interest Expense 176,000
2008 Cash (8% X 4,000,000 / 2) 160,000
Discount on Bonds Payable 16,000
Dec 31 Interest Expense 176,000
2008 Interest Payable (8% X 4,000,000 / 2) 160,000
Discount on Bonds Payable 16,000
Jan 1 Interest Payable 160,000
2009 Cash 160,000

Problem 3

- At 103 means at a premium of 3%.

- Premium amortization is 4 years X 2 times per year = 8 times = 60,000 / 8 = 7,500

Jan 1 Cash (2,000,000 X 103%) 2,060,000

2009 Premium on Bonds Payable 60,000
Bonds Payable 2,000,000
July 1 Interest Expense 92,500
2009 Premium on Bonds Payable 7,500
Cash (10% X 2,000,000 / 2) 100,000
Dec 31 Interest Expense 92,500
2009 Premium on Bonds Payable 7,500
Interest Payable (10% X 2,000,000 / 2) 100,000
Jan 1 Interest Payable 100,000
2010 Cash 100,000