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

DateDescriptionDebitCredit

Jan. 1Cash1,004,720

Premium on Bonds Payable58,720

Bonds Payable946,000

Jun. 30Interest Expense18,349

Premium on Bonds Payable2,936

Cash21,285

Jul. 1Cash1,729,164

Discount on Bonds Payable70,836

Bonds Payable1,800,000

Dec. 31Interest Expense18,349

Premium on Bonds Payable2,936

Cash21,285

31Interest Expense37,403

Discount on Bonds Payable5,903

Cash31,500

31Retained Earnings74,101

Interest Expense74,101

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)?

$

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.

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?

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:

Journal

DateDescriptionDebitCredit

Jun. 30Interest Expense18,349

Premium on Bonds Payable2,936

Cash21,285

30Interest Expense37,403

Discount on Bonds Payable5,903

Cash31,500

30Bonds Payable1,800,000

Gain on Redemption of Bonds41,000

Discount on Bonds Payable59,030

Cash1,699,970

Dec. 31Interest Expense18,349

Premium on Bonds Payable2,936

Cash21,285

31Retained Earnings74,101

Interest Expense74,101

31Bonds Payable473,000

Premium on Bonds Payable23,488

Loss on Redemption of Bonds20,600

Cash517,088

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