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Grocery Corporation received $315,953 for 10.50 percent bonds issued on January 1, 2021, at a market interest rate of 7.50 percent. The bonds had a total face value of $262,000, stated that interest would be paid each December 31, and stated that they mature in 10 years.

Required:

Prepare the following table for each account by indicating (a) whether it is reported on the Balance Sheet (B/S) or Income Statement (I/S); (b) the dollar amount by which the account increases, decreases, or does not change when Grocery Corporation issues the bonds; and (c) the direction of change in the account [increase, decrease, or no change] when Grocery Corporation records the interest payment on December 31.

1 Answer

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Final answer:

When Grocery Corporation issues $315,953 in bonds, the Cash account (B/S) increases by $315,953, Bonds Payable (B/S) by $262,000, and Premium on Bonds Payable (B/S) by $53,953. Upon interest payment, Interest Expense (I/S) rises by $27,650, Cash decreases by $27,510, and Premium on Bonds Payable decreases by $140.

Step-by-step explanation:

When Grocery Corporation issues bonds, it affects both the Balance Sheet (B/S) and Income Statement (I/S). Initially, upon issuing the bonds, Cash account (B/S) increases by $315,953, and Bonds Payable (B/S) increases by $262,000, reflecting the face value of the bonds. The difference, $53,953, is reported as Premium on Bonds Payable (B/S). This premium is created because the bonds were issued at a higher price due to the market interest rate being lower than the bond's stated rate.

When the interest payment is recorded on December 31, the Interest Expense (I/S) increases by $27,650 (calculated as 7.50% of $262,000), and the Premium on Bonds Payable decreases by the difference between the stated interest paid ($27,510, which is 10.50% of $262,000) and the Interest Expense ($27,650), resulting in a decrease of $140. When Grocery Corporation records the interest payment on December 31, the Bond Payable (B/S) decreases by the amount of interest paid, and the Cash (B/S) decreases by the amount of interest paid. There's also a change in the Cash account, which decreases by $27,510 when the interest payment to bondholders is made.

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