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Grocery Corporation received $330,654 for 9.50 percent bonds issued on January 1, 2018, at a market interest rate of 6.50 percent. The bonds had a total face value of $272,000, stated that interest would be paid each December 31, and stated that they mature in 10 years. Required: Prepare the following table for each account by indicating (a) whether it is reported on the Balance Sheet (B/S) or Income Statement (I/S); (b) the dollar amount by which the account increases, decreases, or does not change when Grocery Corporation issues the bonds; and (c) the direction of change in the account [increase, decrease, or no change] when Grocery Corporation records the interest payment on December 31.

Respuesta :

temmydbrain

Answer:

Explanation:

Issue price of bond = $330,654

Face Value = $272000

Premium on issue of bond = $330,654 - $272000 = 58654

Journal entry for bond issuance:

Cash Dr $330,654

Bonds Payable $272000

Premium on Bonds payable $58654

(Being bond issued at a premium of $58654)

As per effective interest method, interest expense = market rate * book value of bond

= 6.5% * $330,654 = $21492.5

Cash interest = $272000 * 9.5% = $25840

Premium to be amortized on interest date = $25840 - $21492.5 = $4347.5 or $4348

Journal entry for interest payment on December 31:

Account                            Financial            Issuance  Interest paid

                                         Statement    

Bonds payable                 Balance Sheet  272000  

Discount on Bonds payable  NA                NA                     NA  

Interest expense               Income Statement   0                 21492.5

Premium on Bonds Payable     Balance Sheet  58654          -3813

   

Note: Interest expense for the year:    

Interest to be paid ($272000 * 9.5%)                25840  

Less: Amortization of Premium (58654/6.5)      3813  

Interest expense                                                21492.5  

   

Journal entry:    

Interest expense Dr.                                          21492.5  

Premium on Bonds payable Dr.                          3813  

       Cash Account                                                                 25306  

Note: here, it has been premium has been written on Straight line basis.

anthougo

The Effects of Transactions on the Grocery Corporation's Financial Statements are as follows:

a. Proceeds from Bonds Issuance +$330,654 Balance Sheet (Assets (Cash will increase))

b. Face value of Bonds +$272,000                   Balance Sheet (Liabilities (Bonds Payable will increase))

c. Bonds Premium +$58,654                           Balance Sheet (Equity will increase)

d. Payment of interest -$25,840                       Balance Sheet (Assets (Cash will decrease))

e. Interest Expense = -$21,493                        Income Statement (Expenses will increase)

f. Amortization of Premium = -$4,347              Balance Sheet (Equity will reduce)

Data Analysis:

Bonds Proceeds = $330,654

Bonds face value = $272,000

Bonds premium = $58,654 ($330,654 - $272,000)

Coupon interest rate = 9.5%

Bonds issuance date = January 1, 2018

Market interest rate = 6.5%

Interest Payment on December 31 = $25,840 ($272,000 x 9.5%)

Amortization of Premium = $4,347 ($25,840 - $21,493)

Interest Expense = $21,493 ($330,654 x 6.5%)

Thus, when Grocery Corporation records the interest payment on December 31, the Interest Expense of $21,493 will decrease the profit on the Income Statement and decrease the Bonds Premium on the Balance Sheet by $4,347.

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