Supplemental Instruction Handouts
Financial Accounting
Chapter 15:
Bonds Payable
Answer Key
1. Elmer Co. issued a group of bonds on January 1st, 2012, that pay interest semiannually
on June 30th and December 31st. The face value of the bond is $800,000, the annual
contract rate is 8%, and the bonds mature in 3 years. These bonds were issued at their
par value on January 1st, 2012.
Required:
Give the general journal entry that would be required on:
The date of issuance:
Date
Jan 1
General Journal
Account Titles and Explanations
Cash
Bonds Payable
PR
Debit
800,000
Page ____
Credit
800,000
The first interest payment date:
Date
June 30
General Journal
Account Titles and Explanations
Bond Interest Expense
Cash
$800,000 x 8% x 6/12
PR
Debit
32,000
Page ____
Credit
32,000
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
2. Helm Co. has a group of bonds dated July 1st, 2012, that pays interest semiannually on
December 31st and June 30th. The face value of the bond is $40,000, the annual contract
rate is 8%, and the bonds mature in 3 years. These bonds were issued at their par value
on October 1st, 2012.
Required:
Give the general journal entry that would be required:
The date of issuance of the bond:
Date
Oct 1
General Journal
Account Titles and Explanations
Cash
Bonds Payable
Interest Payable
$40,000 x 8% x 3/12 (July, August and September)
PR
Debit
40,800
Page ____
Credit
40,000
800
The first interest payment:
Date
Dec 31
General Journal
Account Titles and Explanations
Bond Interest Expense
Interest Payable
Cash
$40,000 x 8% x 6/12
PR
Page ____
Credit
Debit
800
800
1,600
The second interest payment:
Date
June 30
General Journal
Account Titles and Explanations
Bond Interest Expense
Cash
PR
Debit
1,600
Page ____
Credit
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
1,600
3. Gleason Co. issued a group of bonds on January 1st, 2012, that pay interest
semiannually on June 30th and December 31st. The face value of the bond is $180,000,
the annual contract rate is 8%, and the bonds mature in 3 years. On January 1 st, 2012,
these bonds were issued at a market rate of 6% semiannually.
Required:
A) Calculate the issue price of the bond.
Interest Payments per Period = Face Value of Bond x Bond Interest Rate ÷ Number of
Payments per Year
Interest Payments per Period = $180,000 x 8% ÷ 2 = $7,200
Number of Interest Payments in Total = Years x Number of Interest Payments per Year
Number of Interest Payments in Total = 3 years x 2 = 6
Interest Rate per Period = Market Interest Rate for the Year ÷ Number of Interest
Payments per Year
Interest Rate per Period = 6% ÷ 2 = 3%
To use the tables we go across to the interest per period and then down to the number
of interest payments in total.
On Table 17A.1: 3% across and 6 down gives us 0.8375. This will be used to calculate
the present value of the face value of the bond.
On Table 17A.2: 3% across and 6 down gives us 5.4172. This will be used to calculate
the present value of the interest payments.
Present Value of Face Value of Bond = Face Value of Bond x Value from Table 17A.1
Present Value of Face Value of Bond = $180,000 x 0.8375 = $150,750
Present Value of Interest Payments = Interest Payments per Period x Value from Table
17A.2
Present Value of Interest Payments = $7,200 x 5.4172 = $39,003.84
Present Value of the Bond = Present Value of Face Value of Bond + Present Value of
Interest Payments
Present Value of Bond = $150,750 + $39,003.84 = $189,753.84 round up to $189,754
B) Calculate the Premium or Discount on the Bonds Payable.
Premium on Bonds Payable = Present Value of the Bond – Face Value of the Bond
Premium on Bonds Payable = $189,754 – $180,000 = $9,754
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
C) Calculate the total bond interest expense that will be recognized over the life of these
bonds.
Total Cash Interest Paid = Interest Payments per Period x Number of Interest Payments
in Total
Total Cash Interest Paid = $7,200 x 6 = $43,200
Total Bond Interest Expense = Total Cash Interest Paid – Premium on Bonds Payable
Total Bond Interest Expense = $43,200 – $9,754 = $33,446.
D) Calculate the interest expense for the first two interest payments using the effective
interest method.
The first interest payment:
We start by computing the bond interest expense.
Bond Interest Expense = Present Value of the Bond x Interest Rate per Period
Bond Interest Expense = $189,754 x 3% = $5,692.62 round up to $5,693
Now we can compute the premium amortization.
Premium Amortization = Interest Payments per Period – Bond Interest Expense
Premium Amortization = $7,200 – $5,693 = $1,507
The Second Interest Payment:
First we need to update the value of the Bond Payable by subtracting the premium
amortization from the present value of the bond.
Value of the Bond Payable = Current Value of the Bond Payable – Premium Amortization
from the previous Interest Payment
Value of the Bond Payable = $189,754 – $1,507 = $188,247
Now we can compute the bond interest expense.
Bond Interest Expense = $188,243 x 3% = $5,647.41 round down to $5,647
Now we can compute the premium amortization.
Premium Amortization = $7,200 – $5,647 = $1,553
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
E) Give the general journal entry that would be required:
The date of issuance of the bond
Date
Jan 1
General Journal
Account Titles and Explanations
Cash
Bonds Payable
Premium on Bonds Payable
PR
Debit
189,754
Page ____
Credit
180,000
9,754
The first interest payment:
Date
June 30
General Journal
Account Titles and Explanations
Bond Interest Expense
Premium on Bonds Payable
Cash
PR
Debit
5,693
1,507
Page ____
Credit
7,200
The second interest payment:
Date
Dec 31
General Journal
Account Titles and Explanations
Bond Interest Expense
Premium on Bonds Payable
Cash
PR
Debit
5,647
1,553
Page ____
Credit
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
7,200
4. Mixer Co. issued a group of bonds on January 1st, 2012, that pay interest semiannually
on June 30th and December 31st. The face value of the bond is $500,000, the annual
contract rate is 6%, and the bonds mature in 3 years. On January 1st, 2012, these bonds
were issued at a market rate of 10% semiannually.
Required:
A) Calculate the issue price of the bonds.
We will use the same process as we used in question #3 part A.
Interest Payments per Period = $500,000 x 6% ÷ 2 = $15,000
Number of Interest Payments in Total = 3 years x 2 = 6
Interest Rate per Period = 10% ÷ 2 = 5%
On Table 17A.1: 5% across and 6 down gives us 0.7462. This will be used to calculate
the present value of the face value of the bond.
On Table 17A.2: 5% across and 6 down gives us 5.0757. This will be used to calculate
the present value of the interest payments.
Present Value of Face Value of Bond = $500,000 x 0.7462 = $373,100
Present Value of Interest Payments = $15,000 x 5.0757 = $76,135.50
Present Value of Bond = $373,100 + $76,135.50 = $449,235.50 round up to $449,236
B) Calculate the Premium or Discount on the Bonds Payable.
Discount on Bonds Payable = Present Value of the Bond – Face Value of the Bond
Discount on Bonds Payable = $449,236 – $500,000 = ($50,764)
C) Calculate the total bond interest expense to be recognized over the life of these
bonds.
Again, we will use the same process that we used in question #3 part C.
Total Cash Interest Paid = $15,000 x 6 = $90,000
Total Bond Interest Expense = Total Cash Interest Paid + Discount on Bonds Payable
Total Bond Interest Expense = $90,000 + $50,764 = $140,764
D) Calculate the interest expense for the first two interest payments using the effective
interest method.
The first interest payment:
We start by computing the bond interest expense.
Bond Interest Expense = Present Value of the Bond x Interest Rate per Period
Bond Interest Expense = $449,236 x 5% = $22,461.80 round up to $22,462
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
Now we can compute the discount amortization.
Discount Amortization = Interest Payments per Period – Bond Interest Expense
Discount Amortization = $15,000 – $22,462 = ($7,462)
The Second Interest Payment:
First we need to update the value of the Bond Payable by adding the discount
amortization from the present value of the bond.
Value of the Bond Payable = Current Value of the Bond Payable + Discount Amortization
from the previous Interest Payment
Value of the Bond Payable = $449,236 + $7462 = $456,698
Now we can compute the bond interest expense.
Bond Interest Expense = $456,698 x 5% = $22,834.90 round up to $22,835
Now we can compute the premium amortization.
Discount Amortization = $15,000 - $22,835 = ($7,835)
E) Give the general journal entry that would be required on the date of issuance of the
bond and the first two interest payment dates.
The date of issuance of the bond
Date
Jan 1
General Journal
Account Titles and Explanations
Cash
Discount on Bonds Payable
Bonds Payable
PR
Debit
449,236
50,764
Page ____
Credit
500,000
The first interest payment:
Date
June 30
General Journal
Account Titles and Explanations
Bond Interest Expense
Discount on Bonds Payable
Cash
PR
Debit
22,462
Page ____
Credit
7,462
15,000
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.
The second interest payment:
Date
Dec 31
General Journal
Account Titles and Explanations
Bond Interest Expense
Discount on Bonds Payable
Cash
PR
Debit
22,835
Page ____
Credit
7,835
15,000
Academic Success Centre
www.rrc.mb.ca/asc
These answers were created by Michael Reimer for the Academic Success Centre.