Question

Barnett Industries, Inc., issued $600,000 of 8% bonds on January 1, 2019. The bonds pay interest semiannually on July 1 and January 1. The maturity date on these bonds is December 31, 2028. The firm uses the effective interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 9%. Barnett incurred legal and investment banking fees of $22,000 in issuing the bonds and amortizes these costs annually on a straight-line basis.

Required:

1. Calculate the selling price of the bonds.
2. Prepare journal entry for the issuance of the bonds and bond issue costs.
3. Assume that Barnett uses IFRS. Prepare the journal entry for the issuance of the bonds.

Answer 1

To calculate the selling price of the bonds, determine the present value of future cash flows using the effective interest rate. Journal entry for issuance includes debiting Cash and crediting Bonds Payable. Under IFRS, bond issue costs are recognized as an expense immediately.

Step-by-step explanation:

To calculate the selling price of the bonds, we need to determine the present value of all future cash flows.

The cash flows include the semiannual interest payments and the principal repayment at maturity.

Using the effective interest rate of 9%, we can calculate the present value of each cash flow. Once we have the present values, we sum them up to get the selling price of the bonds.

The journal entry for the issuance of the bonds and bond issue costs would include debiting Cash for the selling price of the bonds and crediting Bonds Payable for the face value of the bonds.

Additionally, we would debit Bond Issue Costs for the legal and investment banking fees incurred.

If Barnett uses IFRS, the journal entry for the issuance of the bonds would be similar to the previous entry.

However, the bond issue costs would be recognized as an expense immediately instead of being amortized over time.