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	1,585,068
	Discount on Bonds Payable	64,932
	Bonds Payable		1,650,000
Dec. 31	Interest Expense	18,349
	Premium on Bonds Payable	2,936
	Cash		21,285
31	Interest Expense	34,286
	Discount on Bonds Payable		5,411
	Cash		28,875
31	Retained Earnings	70,984
	Interest Expense		70,984

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

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)?

$fill in the blank a82a54fe2ffc070_3

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

$fill in the blank a82a54fe2ffc070_4

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

Jan. 1

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

$fill in the blank a82a54fe2ffc070_6

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?

$fill in the blank a82a54fe2ffc070_8

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	34,286
	Discount on Bonds Payable		5,411
	Cash		28,875
30	Bonds Payable	1,650,000
	Gain on Redemption of Bonds		41,000
	Discount on Bonds Payable		54,110
	Cash		1,554,890
Dec. 31	Interest Expense	18,349
	Premium on Bonds Payable	2,936
	Cash		21,285
31	Retained Earnings	70,984
	Interest Expense		70,984
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?

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?

Jun. 30, Year 2 Why?

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

g. It depends on the face value of the bond

h. Interest expenses

______________?