Issuance Of Bonds Between Interest Dates Straight Line

P14 6 Issuance Of Bonds Between Interest Dates Straight Line Redemp

Presented below are 5 selected transactions on the books of Simonson Corporation. 5 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2015, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash.

The company’s stock was selling for $31 per share on March 1, 2015. Instructions Prepare the journal entries needed on the books of Seminole Company to record the following. (a) April 1, 2014: issuance of the bonds. (b) October 1, 2014: payment of semiannual interest. (c) December 31, 2014: accrual of interest expense. (d) March 1, 2015: extinguishment of 6,000 bonds. (No reversing entries made.)

Bonds payable with a par value of $900,000, which are dated January 1, 2014, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2024. (Use interest expense account for accrued interest.) Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.) Interest on the bonds is paid. Bonds with par value of $360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.) Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized. (Round to two decimal places.) Prepare journal entries for the transactions above.

XYZ Company, INC. Profit and Loss Statement Year Ended December 31, 20XX % Sales 1,750,450 Returns and allowances 2,752 Net Sales 1,747,698 Cost of Sales Beginning Inventory 50,000 Purchases 610,162 Production Labor 420,108 Ending Inventory 30,000 Total Cost of Sales 1,050,270 Gross Profit 697,428 Selling Expense Wages 75,000 Commissions 25,000 Marketing 25,000 Total Selling Expenses 125,000 Operating Expense Salaries 225,000 Payroll taxes 29,000 Benefits 27,000 Office Supplies 500 Postage 250 Professional Fees 2,000 Telephone 850 Utilities 950 Training & Education 250 Miscellaneous 50 Total Operating Expense 285,850 Operating Profit—EBITDA 286,578 Other Income (Expense) Interest (9,650) Depreciation (12,000) Amortization (2,500) Total Other Income (Expense) (24,150) Total Pre-tax Profit 262,428 Income Tax Allowance 118,093 Net Profit 144,335

Balance Sheet For Year Ending December 31, 20XX ASSETS Current Assets Cash 10,525 Accounts Receivable 27,000 Inventory 30,000 Prepaid Expenses 2,000 Total Current Assets 69,525 Fixed Assets Property—net of depreciation 215,000 Equipment—net of depreciation 80,000 Vehicles—net of depreciation 5,000 Total Fixed Assets 300,000 Total Assets 369,525 LIABILITIES Current Liabilities Revolving lines of credit 20,000 Accounts Payable 5,000 Current Portion of Long-term Debt 15,000 Total Current Liabilities 40,000 Long-term Liabilities Long-term debt and capital leases 45,500 Loans payable to stockholders 60,500 Total Long-term Liabilities 106,000 Total Liabilities 146,000 Stockholders Equity Common stock 1,000 Additional Paid-in Capital 25,000 Retained Earnings (Cum from prior years) 53,190 Retained Earnings (From current P&L) 144,335 Total Stockholders Equity 223,525 Total Liabilities and Stockholders Equity 369,525

Paper For Above instruction

The issuance and management of bonds play a pivotal role in corporate finance, serving as vital instruments for raising capital, managing debt, and optimizing a company's financial structure. This paper explores the journal entries and accounting procedures associated with various bond transactions, focusing on bond issuance between interest dates, straight-line amortization methods, bond redemption, and extinguishment processes, exemplified through specific transactions of Seminole and Simonson Corporations. Additionally, it examines the financial statements of XYZ Company to provide context on how bond-related activities influence overall financial health and reporting.

Introduction

Corporate bonds are long-term debt securities issued by companies to investors, providing a source of financing that complements equity capital. Proper accounting for bond transactions is essential to present an accurate picture of a company's financial position and performance. The use of different interest calculation methods, amortization techniques, and timing of bond issuance or redemption can significantly impact financial statements. This paper details the journal entries for bond issuance, interest payments, amortizations, and redemptions, particularly focusing on scenarios where bonds are issued between interest dates and managed using straight-line amortization methods, as illustrated by the case studies of Seminole and Simonson Corporations.

Bond Issuance and Interest Payments

When bonds are issued, the initial journal entry records cash received, the liability recognized in bonds payable, and any premium or discount associated with the bonds. For example, on April 1, 2014, Simonson Corporation would record the issuance of bonds at a premium, considering the bonds were issued at 106 plus accrued interest. The premium is calculated based on the difference between the amount received and the face value of the bonds, and is amortized over the life of the bonds using the straight-line method as detailed in the accounting policy.

Interest payments, scheduled semiannually, are recorded and include the cash payment and the amortization of bond premium or discount. For bonds issued at a premium, the premium reduces the interest expense recognized in each period, reflecting the effective cost of borrowing. The interest payment on October 1, 2014, would reflect the coupon rate of 12%, resulting in a semiannual payment of $54,000 (12% annually on $900,000 face value divided by two).

Accrual and Amortization of Bonds

Adjusting entries are necessary at year-end to accrue interest expense, especially when bonds are issued between interest dates. Using the straight-line amortization method, the premium or discount is amortized evenly over the bond's life, which simplifies calculations but requires careful entries to reflect true interest expense. The accrued interest at December 31, 2014, must reflect the portion of interest earned but not yet paid, adjusting for the amortization of premium or discount. This ensures that interest expense reported in the income statement accurately reflects the cost of borrowing during the period.

Bond Redemption and Extinguishment

When bonds are redeemed, whether at maturity or prior to maturity, the company accounts for the redemption by removing the bonds payable and recognizing any gain or loss based on the difference between the carrying amount of the bonds and the redemption price. For instance, Simonson's redemption of bonds at 102 plus accrued interest involves adjusting the bonds payable account, amortizing the premium accordingly, and recording the cash paid. The extinguishment of bonds before maturity, such as Seminole's repurchase of bonds with shares of stock, requires careful valuation, including the fair value of the stock issued and any associated gain or loss.

Impact on Financial Statements

Bond transactions influence various components of financial statements. The balance sheet reflects the carrying amount of bonds payable, adjusted for premium or discount amortization. The income statement records interest expense, affected by bond amortization techniques, which impacts net income. The statement of cash flows is affected by cash received from bond issuance, payments for interest, and redemption costs. Accurate accounting ensures transparency and compliance with accounting standards such as GAAP or IFRS, providing stakeholders with meaningful insights into the company’s debt management and financial sustainability.

Conclusion

Effective management of bond transactions requires precise accounting and journal entries that reflect the timing, amortization methods, and redemption terms. The straight-line amortization method simplifies calculations but requires consistent application across periods. Understanding these principles, as demonstrated through the examples of Seminole and Simonson Corporations, is essential for accurate financial reporting and strategic financial management. Properly recorded bond transactions not only comply with accounting standards but also enhance investor confidence and facilitate better financial decision-making.

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