Accounting 4

Quiz 4

Problem 1
Supersonic Company was authorized to issue 12%, 10 -year bonds with face amount of P7,000,000 on April,
2020. Interest on the bonds is payable semiannually on April 1 and October 1 of each year. The bonds were sold
to underwriters on April 1, 2020 at 106. The entity amortizes discount or premium only at the end of the fiscal
year, using the straight line method.

Required:

1. Prepare journal entries for 2020 and 2021 including adjustments at the end of each year. Use
memorandum approach.
2. Compute the interest expense to be shown in the income statement on December 31, 2021.
3. If the bonds were sold on June 1 instead of April 1, what is the journal entry to record the sale of the
bonds?

SOLUTION:
Requirement 1 (Journal entries, 2020 – 2021)

Date Particulars Debit Credit

2020
Apr 1 Cash (P7M x 106%) 7,420,000
Bonds payable 7,000,000
Premium on bonds payable 420,000
Issuance of bonds.

Oct 1 Interest expense 420,000

Cash 420,000
Payment of interest.

Dec 31 Interest expense (7M x 12% x 3/12) 210,000

Interest payable 210,000
Accrual of interest.

31 Premium on bonds payable (420,000/10) x 9/12 31,500

Interest expense 31,500
Amortization of premium.
2021
Jan 1 Interest payable 210,000
Interest expense 210,000
To reverse accrual of interest.

Apr 1 Interest expense 420,000

Cash 420,000
Payment of interest.

Oct 1 Interest expense 420,000

Cash 420,000
Payment of interest.

Dec 31 Interest expense (7M x 12% x 3/12) 210,000

Interest payable 210,000
Accrual of interest.

31 Premium on bonds payable (420,000/10 ) 42,000

Interest expense 42,000
Amortization of premium.
1
Requirement 2:

Nominal interest (P7,000,000 x 12%) P840,000

Less: Amortization of premium 42,000
Interest expense to be shown in the income statement on 12.31.21 P798,000

OR

Interest Expense
2021 2021
Apr 1 P420,000 Jan 1 P 210,000
Oct 1 420,000 Dec 31 42,000
Dec 31 210,000
Balance, Dec 31, 2021 P798,000

Requirement 3:
2020
June 1 Cash 7,560,000
Bonds payable 7,000,000
Premium on bonds payable 420,000
Interest expense (P7M x 12% x 2/12) 140,000
Issuance of bonds.

Computation:
Selling price or issue price (P7,000,000 x 106%) P7,420,000
Add: Accrued interest (P7,000,000 x 12% x 2/12) 140,000
Total cash received P7,560,000

Problem 2 (BSAIS)

On January 1, 2020, Clan Company issued 3-year 12% bonds payable with face amount of P2,000,000. The bonds
pay interest semiannually on January 1 and July 1. The bonds were issued for P2,101,520 which represents an
effective rate of 10% per year.

Required:
1. Prepare all journal entries related to the bonds in 2020 using memorandum approach. Use effective
interest method of amortization.
2. What is the carrying value of the bonds on December 31, 2020?

SOLUTION:
Requirement 1 (Journal entries, 2020 – 2021)

Date Particulars Debit Credit

2020
Jan 1 Cash 2,101,520
Bonds payable 2,000,000
Premium on bonds payable 101,520
Issuance of bonds.

Jul 1 Interest expense (2,000,000 x 12% x 6/12) 120,000

Cash 120,000
Payment of interest.

1 Premium on bonds payable 14,924

Interest expense 14,924
Amortization of premium.

2
 Dec 31 Interest expense (2,000,000 x 12% x 6/12)) 210,000
Interest payable 210,000
Accrual of interest.

31 Premium on bonds payable 15,670

Interest expense 15,670
Amortization of premium.

Schedule of amortization:
Interest paid Effective interest Amortization Carrying value
(a) (b) (c = a-b) (present value)
Jan 1, 2020 2,101,520
July 1, 2020 120,000 105,076 14,924 2,086,596
Jan 1, 2021 120,000 104,330 15,670 2,070,926
July 1, 2021 120,000 103,546 16,454 2,054,472
Jan 1, 2022 120,000 102,724 17,296 2,037,176
July 1, 2022 120,000 101,859 18,141 2,019,035
Jan 1, 2023 120,000 100,965 19,035 -
 Amount in (c) is deducted from the carrying value at preceding period
to get the present value for the current period. Ex: 2,101,520 – 14,924
= 2,086,596
 Effective interest is computed as follows:
 For July 1, 2020: 2,101,520 x 10% x 6/12 = 105,076
 For Jan 1, 2021: 2,086,596 x 10% x 6/12 = 104,330

Requirement 2

From the amortization table, Carrying value on Dec. 31, 2020 is P2,070,926

OR

Face value of bonds Jan 1, 2020 P2,000,000

Add: Unamortized premium (101,520 – 14,924 – 15,670) 70,926
Carrying value, Dec. 31 P2,070,926

Problem 3
Marbel Company was authorized to issue 12% bonds with face amount of P5,000,000 on April 1, 2020. Interest
on the bonds is payable semiannually on April 1 and October 1. The bonds mature on April 1, 2025.

The entire issue was sold on April 1,2020, at 98 less bond issue cost of P50,000.

On July 1, 2022, bonds of P2,000,000 face amount were redeemed at 99 plus accrued interest.

Required:
3. Prepare all journal entries related to the bonds in 2020 and 2021 using memorandum approach.
4. Prepare journal entry to record the redemption of the bonds on July 1, 2022.
5. How much interest expense will be shown in the income statement on December 31, 2020?
6. What is the carrying value of the bonds on December 31, 2020?

SOLUTION:
Requirement 1 (Journal entries, 2020 – 2021)

Date Particulars Debit Credit

2020
Apr 1 Cash (P5M x 98%) – 50,000 4,850,000
Discount on bonds payable 250,000
Bonds payable 5,000,000
Issuance of bonds.

3
 Oct 1 Interest expense 300,000
Cash 300,000
Payment of interest.

Dec 31 Interest expense (5M x 12% x 3/12) 150,000

Interest payable 150,000
Accrual of interest.

31 Interest expense 37,500

Discount on bonds payable (250,000/5 years x 9/12) 37,500
Amortization of discount.
2021
Jan 1 Interest payable 150,000
Interest expense 150,000
To reverse accrual of interest.

Apr 1 Interest expense 300,000

Cash 300,000
Payment of interest.

Oct 1 Interest expense 300,000

Cash 300,000
Payment of interest.

Dec 31 Interest expense (7M x 12% x 3/12) 150,000

Interest payable 150,000
Accrual of interest.

31 Interest expense 50,000

Discount on bonds payable (250,000/5 years) 50,000
Amortization of discount.

Requirement 2: Journal entries to record the redemption of the bonds on July 1, 2022:

2022
July 1 Interest expense 25,000
Discount on bonds payable (250,000/5 x 6/12) 25,000
Amortization from Jan 1 to July 1

1 Bonds payable 2,000,000

Loss on redemption of bonds 35,000

Discount on bonds payable (250,000/5 years) 50,000

Amortization of discount.

Computation:
Redemption price (P2,000,000 x 99%) P1,980,000
Carrying Value of bonds redeemed:
Face value of bonds P2,000,000
Less: Unamortized discount on bonds
redeemed 55,000 1,945,000
Loss on redemption P 35,000

Bond discount P250,000

Less: Amortization from April 1, 2020 to
July 1, 2022 (250,000 x 27/60) 112,500
Unamortized discount, July 1, 2022 137,500*
X Fraction of bonds sold or redeemed 2/5

4
 Unamortized discount on bods redeemed P 55,000

OR

Discount on Bonds Payable

2020
Apr 1 250,000 Dec 31, 2020 37,500
Dec 31, 2021 50,000
Jul 1, 2022 25,000
Balance, 7.1.22 137,500

Requirement 3: Interest expense, Dec. 31, 2020

Nominal interest (P5,000,000 x 12% x 9/12) P450,000

Add: Amortization of discount in 2020 37,500
Interest expense to be shown in the income statement on 12.31.21 P487,500

OR
Interest Expense
Oct 1, 2020 300,000
Dec 31, 2020 150,000
Dec 31, 2020 37,500
Balance, Dec 31, 2020 487,500

Requirement 4: Carrying value of bonds on Dec. 31, 2020

Face value P5,000,000

Less: Unamortized Discount on bonds payable
Discount P250,000
Less: Amortization 37,500 212,500
Carrying value, Dec. 31, 2020 P4,787,500