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 year's journal entries, shown as follows: Journal Entries, Year 1 Journal Date Description Debit Credit Jan. 1 Cash 1,008,960 Premium on Bonds Payable 58,960 Bonds Payable 950,000 Jun. 30 Interest Expense 18,427 Premium on Bonds Payable 2,948 Cash 21,375 Jul. 1 Cash 1,921,280 Discount on Bonds Payable 78,720 Bonds Payable 2,000,000 Dec. 31 Interest Expense 18,427 Premium on Bonds Payable 2,948 Cash 21,375 31 Interest Expense 41,560 Discount on Bonds Payable 6,560 Cash 35,000 31 Retained Earnings 78,414 Interest Expense 78,414 Bonds PayableReview 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? V 2. Which entry shows bonds issued at a contract rate lower than the market rate of interest? Choose the date. July 1 3. How much interest was paid during the year on the bonds in question (2)? 4. What is the carrying amount of the bonds in question (2) at the end of the year? 5. Which entry shows bonds that sold for more than their face amount? Choose the date. Jan. 1 V 6. How much interest was paid during the year on the bonds in question (5)? 7. Assuming that straight-line amortization is used for the bonds in question (5), what is the bond life? 10 years 8. What is the carrying value of the bonds in question (5) at the end of the year? Feedback Check My Work 1. Review the journal entries carefully. 2. What type of bond has a contract rate lower than the prevailing market rate? 3. Review the journal entries carefully. 4. How is carrying value determined for discounted bonds?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 18,427 Premium on Bonds Payable 2,948 Cash 21,375 30 Interest Expense 41,560 Discount on Bonds Payable 6,560 Cash 35,000 30 Bonds Payable 2,000,000 Gain on Redemption of Bonds 41,000 Discount on Bonds Payable 65,600 Cash 1,893,400 Dec. 31 Interest Expense 18,427 Premium on Bonds Payable 2,948 Cash 21,375 31 Retained Earnings 78,414 Interest Expense 78,414 31 Bonds Payable 475,000 Premium on Bonds Payable 23,584 Loss on Redemption of Bonds 20,600 Cash 519,184 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? No 2. You suspect there is an error in one of the bond redemption entries. Assuming that the amounts are correct, which entry is questionable?Both entries are correct. Why? There is no error. V 3. Why do some bonds sell below face value? None of these answers is correct. 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 9. It depends on the face value of the bond h. Interest expenses be Feedback Check My Work 1. Look closely at the various journal entries for these bonds in both years. 2. Note that the amounts are assumed to be correct. Review the redemption entry accounts closely. 3. Consider the journal entry when a bond sells below face value. 4. Which items require periodic adjustment? Feedback Check My Work Partially correct