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	1,921,280
	Discount on Bonds Payable	78,720
	Bonds Payable		2,000,000
Dec. 31	Interest Expense	18,349
	Premium on Bonds Payable	2,936
	Cash		21,285
31	Interest Expense	41,560
	Discount on Bonds Payable		6,560
	Cash		35,000
31	Retained Earnings	78,258
	Interest Expense		78,258

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?

123452

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

Jan. 1June 30July 1Sept. 30Oct. 1July 1

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

$fill in the blank 36462d02f07601a_3

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

$fill in the blank 36462d02f07601a_4

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

Jan. 1Jun. 30Jul. 1Sept. 30Oct. 1Dec. 31

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

$fill in the blank 36462d02f07601a_6

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

5 years10 years15 years20 yearsNone of theseCannot be determined

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

$fill in the blank 36462d02f07601a_8

Feedback

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?

5. What type of bond sells for more than the face amount?

6. Review the journal entries carefully.

7. What is amortized? How does amortization relate to bond life?

8. How is carrying value determined for bonds sold at a premium?

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	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	18,349
	Premium on Bonds Payable	2,936
	Cash		21,285
31	Retained Earnings	78,258
	Interest Expense		78,258
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?

YesNoCannot be determined

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.Dec. 31, Year 2Jun. 30, Year 2Both entries have an error.

Why?

There should not be a gain on a discounted bond.There should not be a loss on a bond with a premium.Not all the bonds have been redeemed.None of these answers is correct.There is no error.

3. Why do some bonds sell below face value?

Some bonds have longer maturity dates.Some bonds cannot be amortized effectively.Some bonds are sold at a discount or premium.The face value of some bonds is below market 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

a, cb, ed, fd, ac, gh, f