Account for bonds payable at a discount; amortize by the straight line method — Journalize following transactions Laroux Communications Inc
General StudiesGeneralWorked Solution
Account for bonds payable at a discount; amortize by the straight line method
.:.
Requirements
1. Journalize the following transactions of Laroux Communications, Inc.:
2. At December 31, 2012, after all year-end adjustments, determine the carrying amount of Laroux Communications bonds payable, net.
3. For the six months ended July 1, 2012, determine the following for Laroux Communications, Inc.:
a. Interest expense
b. Cash interest paid
What causes interest expense on the bonds to exceed cash interest paid?
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SOLUTION:
Req. 1
Journal
DATE
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2012
2012
Jan.
1
Cash ($4,000,000 × .95)
3,800,000
Discount on Bonds Payable
200,000
Bonds Payable…………………………...
4,000,000
To issue bonds at a discount.
July
1
Interest Expense
130,000
Cash ($4,000,000 × .06 × 6/12)
120,000
Discount on Bonds Payable
($200,000 / 20)
10,000
To pay interest and amortize bonds.
To pay interest and amortize bonds.
Dec.
31
Interest Expense
130,000
Interest Payable
($4,000,000 × .06 × 6/12)
120,000
Discount on Bonds Payable…………..
10,000
To accrue interest and amortize bonds.
To accrue interest and amortize bonds.
2013
2013
Jan.
1
Interest Payable
120,000
Cash
120,000
To pay interest.
2022
2022
Jan.
1
Bonds Payable
4,000,000
Cash
4,000,000
To pay bonds at maturity.
To pay bonds at maturity.
Req. 2
Carrying amount at December 31, 2012.
Bonds payable, net
($4,000,000 − $200,000 + $10,000 + $10,000)………
$3,820,000
Req. 3
a. Interest expense = $130,000
b. Cash interest paid = $120,000
Interest expense exceeds cash interest paid because the company issued the bonds at a discount and must pay back the full face value of the bonds at maturity. Amortization of the bond discount causes the interest expense on the bonds to exceed the amount of cash interest paid.