Module 7: Accounting for Bonds Payable
Accounting for Bonds Payable
On January 1, 2015, Crabb & Co. issued 10-year bonds with a total face value of $500,000. The bond requires
annual interest payments on December 31 at a stated rate of 6%. Bonds with similar features are discounted in
the market at 8%.
Were the bonds issued at a discount or a premium? Discount How much cash will Crabb & Co. receive from issuing the bond? $432,897 $30,000 = ($500,000 x .06 x 1)…$30,000 x 6.71008 = $201.302...$500,000 x 0.46319 = $231,595…
$201.302 + 231,595 = $432,897
How does this transaction affect Crabb & Co.’s balance sheet on the date of the issuance? Cash
432,897 DATE ACCOUNT NAME Discount on Bonds
Payable Bonds Payable
500,000 DEBIT CREDIT 67,103 A
01/01/15 Cash 432,897 Discount on Bonds Payable 67,103 Bonds Payable INCOME
STMT BALANCE SHEET
= L + E R 500,000 What is the amount of cash interest paid by Crabb & Co. in 2015? $30,000 What is the amount of interest expense on the income statement in 2015? $34,361.80 $432,897 x $.08 = $34,361.80
What is the carrying value of the bond on December 31, 2015? $437,529 - E Module 7: Accounting for Bonds Payable
Prepare the entry at 12/31/15 to record interest expense, cash paid, and discount amortization. DATE ACCOUNT NAME DEBIT CREDIT BALANCE SHEET
A 12/31/15 Interest Expense
Discount on Bonds Payable
Cash = L + 34,631.80 E 4,631.80
30,000 Discount on Bonds Payable….$34,631.80 - $30,000 = $4,631.80
Statement of Cash Flows 2015 2016 Issuance of bond (F) 437,529 442,531 Paid interest (O) 30,000 30,000 Income Statement
Interest expense 34,631.80 35,002.30 Cash 407,529 412,531 Change in Total Assets (30,000) (30,000) Bonds payable, net of
discount 437,529 442,531 Retained earnings 407,529 412,531 Change in Total Liabilities
& Equity (30,000) (30,000) Balance Sheet INCOME
STMT
R - E

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