Question

Lundholm, Inc., reports financial statements each December 31 and issues $600,000, 7%, 15-year bonds dated May 1, 2012, with interest payments on October 31 and April 30. Assuming the bonds are sold at par on May 1, 2012, complete the financial statement effects template to reflect the following events: (a) bond issuance, (b) the first semiannual interest payment, and (c) retirement of $200,000 of the bonds at 101 on November 1, 2012. Use negative signs with your answers, when appropriate.

Answer 1

Answer:

bond issuance:

Dr cash  $600,000

Cr bonds payable        $600,000

first semiannual interest payment:

Dr interest expense    $21000

Cr cash                                     $21000

Retirement of $200,00:

Dr bonds payable($200,000/$600,000*$200,000)$200,000

Dr loss on bond retirement                                                $2000

cr      cash($200,000*101%)                                                                $202,000

Explanation:

The issuance of the bond at par means that the cash realized is exactly the face value of $600,000,hence cash is debited with $600,000 while bonds payable is credited with $600,000.

Bal b/f             interest expense     coupon interest    bal c/f

$600,000          $21000                   $21000               $600,000

A bond issued at par implies that coupon rate equals yield to maturity,hence interest expense is the same as the coupon payment as shown below:

interest expense=coupon interest=$600,000*7%*6/12=$21000

Bal c/f=bal b/f+interest-coupon interest