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

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)?

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

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?

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:

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

Journal Date Credit Debit 1,062,060 Jan. 1 Description Cash Premium on Bonds Payable Bonds Payable 62,060 1,000,000 Jun. 30 Interest Expense Premium on Bonds Payable Cash 19,397 3,103 22,500 Jul. 1 Cash Discount on Bonds Payable Bonds Payable 1,585,068 64,932 1,650,000 Dec. 31 Interest Expense Premium on Bonds Payable Cash 19,397 3,103 22,500 31 34,286 Interest Expense Discount on Bonds Payable Cash 5,411 28,875 31 73,080 Retained Earnings Interest Expense 73,080 Journal Credit Date Description Jun. 30 Interest Expense Premium on Bonds Payable Cash Debit 19,397 3,103 22,500 30 34,286 Interest Expense Discount on Bonds Payable Cash 5,411 28,875 30 1,650,000 Bonds Payable Gain on Redemption of Bonds Discount on Bonds Payable Cash 41,000 54,110 1,554,890 Dec. 31 Interest Expense Premium on Bonds Payable Cash 19,397 3,103 22,500 31 73,080 Retained Earnings Interest Expense 73,080 31 Bonds Payable Premium on Bonds Payable Loss on Redemption of Bonds Cash 500,000 24,824 20,600 545,424