1. Mastery Problem: Liabilities: Bonds Payable

   SpringFit Corporation

   You are an accounting intern working for SpringFit Corporation. You have recently been assigned to help one of the accountants who is doing an internal audit of the business. You will be assisting with a review of the payables issued by SpringFit Corporation. Your first task is to review the previous years journal entries, shown as follows:

   Journal Entries, Year 1

   Journal
   Date	Description	Debit	Credit
   Jan. 1	Cash	1,004,720
   	Premium on Bonds Payable		58,720
   	Bonds Payable		946,000
   Jun. 30	Interest Expense	18,349
   	Premium on Bonds Payable	2,936
   	Cash		21,285
   Jul. 1	Cash	1,729,164
   	Discount on Bonds Payable	70,836
   	Bonds Payable		1,800,000
   Dec. 31	Interest Expense	18,349
   	Premium on Bonds Payable	2,936
   	Cash		21,285
   31	Interest Expense	37,403
   	Discount on Bonds Payable		5,903
   	Cash		31,500
   31	Retained Earnings	74,101
   	Interest Expense		74,101

   Bonds Payable

   Review the journal entries on the SpringFit Corporation panel, then answer the following questions.

   1. Assuming that no bonds had been issued prior to Year 1, how many different bonds appear in the journal entries for this year?

   2. Which entry shows bonds issued at a contract rate lower than the market rate of interest? Choose the date.

   3. How much interest was paid during the year on the bonds in question (2)?

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   4. What is the carrying amount of the bonds in question (2) at the end of the year?

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   5. Which entry shows bonds that sold for more than their face amount? Choose the date.

   6. How much interest was paid during the year on the bonds in question (5)?

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   7. Assuming that straight-line amortization is used for the bonds in question (5), what is the bond life?

   8. What is the carrying value of the bonds in question (5) at the end of the year?

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   Journal Entries, Year 2

   You have been asked to continue your work on the SpringFit Corporation audit. The journal entries for the current year are shown as follows:

   Journal
   Date	Description	Debit	Credit
   Jun. 30	Interest Expense	18,349
   	Premium on Bonds Payable	2,936
   	Cash		21,285
   30	Interest Expense	37,403
   	Discount on Bonds Payable		5,903
   	Cash		31,500
   30	Bonds Payable	1,800,000
   	Gain on Redemption of Bonds		41,000
   	Discount on Bonds Payable		59,030
   	Cash		1,699,970
   Dec. 31	Interest Expense	18,349
   	Premium on Bonds Payable	2,936
   	Cash		21,285
   31	Retained Earnings	74,101
   	Interest Expense		74,101
   31	Bonds Payable	473,000
   	Premium on Bonds Payable	23,488
   	Loss on Redemption of Bonds	20,600
   	Cash		517,088

   Final Questions

   Considering the journal entries for both years, answer the following questions.

   1. Were the bonds in the entry on Dec. 31 of Year 2 redeemed at maturity?

   2. You suspect there is an error in one of the bond redemption entries. Assuming that the amounts are correct, which entry is questionable?

   Why?

   3. Why do some bonds sell below face value?

   4. Which of the following items are amortized?

   a. Bonds

   b. Discounts

   c. Future cash receipts

   d. Redemption amount

   e. Premiums

   f. Contract rate of interest

   g. It depends on the face value of the bond

   h. Interest expenses