Answers Exercise Mock Exam 1: Bonds
The chart of accounts is provided at the end of this exercise. Use only these accounts in your answers.
Please skip a line between the different journal entries.
Green Life Corporation required to raise €1,000,000 for expansion of its operations. The company issued
callable bonds of 9 percent yearly, 15-year dated June 1, 2020. Interest is payable semi-annually on
November 30 and May 31. The bonds were issued at 103 on June 1, 2020, to yield an effective interest rate
of 8.5 percent per year.
The effective interest method is used to amortize the discount at which the bond was issued. Green Life’s
accounting year ends on December 31.
The chart of accounts is added on a separate sheet on your desk. Use only these accounts in your answers.
Please skip a line between the different journal entries.
Question A
Show your calculation of:
1. The first interest payment at November 30, 2020.
2. The interest expense at November 30, 2020.
3. The amortization of the bond premium at November 30, 2020.
4. The accrued interest expense at December 31, 2020.
5. The interest expense at May 31, 2021.
Please round off your answers to whole Euros.
1. Interest payment at November 30, 2020: €1,000,000 * 0.09 * ½ = € 45,000
2. Interest expense at November 30, 2020: €1,030,000 * 0.085 * ½ = 43,775
3. Amortization of bond premium at November 30, 2020: 45,000 – 43,775 = € 1,225
4. The accrued interest expense at December 31, 2020:
Carrying value of bond at November 30, 2020: € 1,000,000 + (30,000 – 1,225) = € 1,028,775
Accrued interest expense at December 31, 2020: €1, 028,775 * 0.085 * 1/12 = € 7,287
5. The interest expense at May 31, 2021:
Carrying value of bond at November 30, 2020: € 1,000,000 + (30,000 – 1,225) = € 1,028,775
Interest expense at May 31, 2021: € 1,028,775 * 0.085 * 5/12 = € 36,436
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Question B
Prepare the journal entries to record:
1. The issue of the bonds on June 1, 2020.
2. The first payment of the interest and the amortization of the premium on November 30, 2020.
3. The accrual of interest and the bond amortization on December 31, 2020.
4. The second payment of the interest and the amortization of the premium on May 31, 2021.
Journal, Green Life
Date
Account
01/06/2020 Cash
Debit
1,030,000
@ Premium on Bonds Payable
Credit
30,000
@ Bonds Payable
1,000,000
30/11/2020 Interest Expense (1,030,000 * 8.5 % * 6/12)
43,775
Premium on Bonds Payable
1,225
@ Cash (1,000,000 * 9% * 6/12)
45,000
31/12/2020 Interest Expense (1,028,775 * 8.5% * 1/12)
7,287
Premium on Bonds Payable
213
@ Interest Payable (1,000,000 * 9% * 1/12)
7,500
31/05/2021 Interest Expense (1,028,775 * 8.5% * 5/12)
36,436
Premium on Bonds Payable
1,064
Interest Payable (1,000,000 * 9% * 1/12)
7,500
@ Cash (1,000,000 * 9% * 6/12)
45,000
Question C
Calculate the total amount that is reported as interest expense (with respect to this bond) in Green Life’s
Income Statement for the year ending December 31, 2020.
Interest expense reported in Income Statement:
€ 43,775 + € 7,287 = € 51,062
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Question D
Calculate the (carrying) amount at which the bonds are reported in Green Life’s Balance Sheet on May 31,
2021.
Carrying amount of bonds at May 31, 2021:
€ 1,000,000 + (€ 30,000 – € 1,125 – € 1,277) = € 1,027,598
On June 1, 2021 Green Life decided to retire the bonds for cash at 101.
Question E
Prepare the journal entry to record the retirement of the bonds for cash.
Journal, Green Life
Date
Account
Debit
01/06
Bonds Payable
1,000,000
Premium on Bonds Payable
Credit
27,598
@ Cash
1,010,000
@ Gain on Redemption of Bonds
17,598
Question F
Which factors determine the size of the premium or discount when issuing bonds? Please mention two
factors.
Market interest rate
Face interest rate
Maturity of the bonds
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Chart of Accounts
Accounts Payable
Accounts Receivable
Bonds Payable
Buildings
Cash Dividends
Cash Dividends Payable
Common Stock
Common Stock Distributable
Discount on Bonds Payable
Gain on Redemption of Bonds
Income Summary
Interest Expenses
Interest Payable
Interest Receivable
Interest Revenues
Loss on Redemption of Bonds
Paid-In Capital from Sale of Treasury Stock
Paid-In Capital in Excess of Par - Common Stock
Paid-In Capital in Excess of Par – Preferred Stock
Preferred Stock
Premium on Bonds Payable
Retained Earnings
Stock Dividends
Stock Dividends Distributable
Treasury Stock
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