University of Michigan
ACC 471
BONDS PAYABLE CASE
This review problem illustrates several of the topics that we cover regarding bonds payable. It
requires you to make various calculations and journal entries for three businesses, each of which
are issuing identical bonds. However, one company’s bonds sell at par; one company’s bonds
sell at a premium; and one company’s bonds sell a
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University of Michigan
ACC 471
BONDS PAYABLE CASE
This review problem illustrates several of the topics that we cover regarding bonds payable. It
requires you to make various calculations and journal entries for three businesses, each of which
are issuing identical bonds. However, one company’s bonds sell at par; one company’s bonds
sell at a premium; and one company’s bonds sell at a discount.
1. Groucho Co. sold $4 million of 10-year bonds on December 31, 2010, with interest
payable June 30 and December 31 at an annual rate of 12%. The bonds were priced to
yield an effective rate of 12%.
a. What were the proceeds received by Groucho upon the sale of the bonds?
Since the market rate was equal to the coupon rate at the date of the sale, the bonds would be
issued at the face amount of $4,000,000.
b. Prepare the journal entry made by Groucho to record the sale of the bonds on December 31,
2010.
| Cash |
4,000,000 |
| Bonds Payable |
4,000,000 |
c. What is the total amount of interest payments to be made by Groucho over the life of the
bonds?
Each coupon payment will be in the amount of: $4,000,000 x 12%/yr. x ½ yr. = $240,000.
$240,000/pmt. x 2 pmts/ yr. x 10/yrs. = $4,800,000.
d. What is the total amount of interest expense that Groucho will record over the life of the
bonds?
Since the bonds were issued at par, total interest expense over the life of the bonds will be equal
to the total coupon payments of $4,800,000.
e. On December 31, 2014, after the company makes the eighth semiannual cash interest payment,
the bonds will (of course) have a net carrying value of $4,000,000. Prepare the journal entry to
record the ninth semiannual payment on June 30, 2015.
Since the bonds were issued at par, the entry for the ninth coupon payment will be the same as for
any of the other coupon payments: |
| Interest Expense |
240,000 |
| Cash |
240,000 |
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