Question

Assumptions: a) interest and amortization are done by the straight-line method; b) interest is paid semiannually on June 30 and December 31. Journalize the following transactions. Post #1 only to the appropriate T accounts. 1 Dominic Company issues $5 million, 5-year, 9% bonds at 103. 1 / 1 از ددد, 155 Cash issued bonds س -17 و و به ده ف (53), ہ و ص : س پہ بار 12 2 | د ده الدب د هر رده نگ دد د دد 6130 paid interest Bad Inbail Exen 210,000 Praires on Band Peyesh 15,00 Cash Bonds Payable دهد. دو د د د دد بدر 115 12 / 31 paid ام د3) مهر یا امام مه وره الا ۶۰ ماهه حارم ولى له دبر ، interest Premium on Bonds Payable دود5) | ددرد15 | 1/1 5 years later موحد 13 باز، 2 | د د د ده ده وفي اليله retired bonds at maturity Bond Interest Expense 2 Dominic Company issues the bonds at 96. 1 / 1 issued درد درد) مدد د,1 دب,دا ساره مه ای سرد و ب دو : رده کارہا ماء داد برود 2 ه «امر - 3) bonds B . 2. میرهای نارگی و و 6 / 30 اور اس کے مرد و و مرور دیا در برگزار paid Discount on Borddrycht cash 20,00 Extra Credit Journalize the transactions assuming Dominic Corp. issues the bonds at 100. interest ده ر25 1 / 1 ارد بدن د ده ؟ 1/1... 5 کار years later ماده و بار به راه دی در دو امانت اردو ادب کا retired bonds at maturity Cash د ده نه درک 6 / 30 د در 225 ادو، اسے رات د3) Cash و رد 275

I don't understand how they got the bond interest expense, premium on bond payable, and discount on bond payable. Please explain the computations involved. Thanks

Answer 1

Explaining the Bond Interest Expense, Premium and Discount on Bonds. 1. Dominic Company issues $ 5 Million, 5- Year, 9% at 103. Bonds issued at $ 103 means the Bond Value having $ 100 is issued at a premium of $ 3 for each bond. So, the bonds having a face value of $ 5,000,000 (50,000 Bonds) are issued at $ 103 each for an amount of $ 5,150,000 (50,000 Bonds @ $ 103 Each). Therefore, the Premium is $ 5,150,000 - $ 5,000,000 = $ 150,000. This premium is to be amortized equally over the period of Bond's Life. The Life of Bond is 5 Years. Since, the interest is paid semi-annually, there will be 10 period (1 Period = 6 Months). Premium of $ 150,000 / 10 Periods = $ 15,000 per Period. Bond Interest Expense is the Interest payable on the Bond at the due date. Like for e.g. In the Case (a), the interest on bonds are payable semi-annually, which means that the interest is paid two times a year. Interest is always calculated and paid on the par value of the bond and not on the issue price. In this case, the Par Value is $ 5 Million, whereas the Issue Value is $ 5,150,000. So, Interest is calculated as follows: Interest Expense = $ 5,000,000 * 9% * 6 Months / 12 Months. Interest Expense = $ 225,000 The Dominic Company is required to pay this much amount in cash. So, cash account is credited by this amount. But, when the bonds are issued at premium or discount, the premium or discount is to be amortized over the life of the bond. So, the Net Interest Expense will be the difference between the amount actually to be paid in cash and the premium / discount amortization. You can more clarity if the Bond Amortization Schedule is prepared.

Date Cash Received / Paid Interest Expense Bond | Carrying Premium Amount of Amortization Bonds 1/1 $ $ A $ A A 6/30 12/31 6/30 12/31 6/30 12/31 6/30 12/31 6/30 12/31 1/1 $ 51,50,000 $ -2,25,000 $ -2,25,000 -2.25,000 -2,25,000 -2,25,000 -2,25,000 -2,25,000 $ -2.25,000 $ -2.25,000 $ -2,25,000 $ -50,00,000 $-21,00,000 -210,000 $ -2,10,000 $ -2,10,000 -2,10,000 -2,10,000 -2,10,000 $ -2,10,000 -2,10,000 -2,10,000 -2,10,000 $ $ 51,50,000 15,000 $ 51,35,000 15,000 $ 51,20,000 15,000 $ 51,05,000 15.000 $ 50.90.000 15,000 $ 50,75,000 15,000 $ 50,60,000 15,000 $ 50,45,000 15,000 $ 50,30,000 15,000 $ 50,15,000 15,000 $ 50,00,000 A A $ $ $ $-21,00,000 $ 1,50,000 2. Dominic Company issued the bonds at $ 96. Similarly, the company issued the bonds at discount, which means $ 100 bond is issued at a discount of $ 4 per Bond. Discount on Bonds = 50,000 Bonds * $ 4 = $ 200,000. This Discount is to be amortized over 10 Periods gives an amount of $ 20,000 per period. Since, it is a loss to the company, the Total Interest Expense = $ 225,000 + $ 20,000 = $ 245,000.