On august 1 2005, airbus Ltd. (a company that records adjusting entries only once per year) issued bonds with the following characteristics: Sh.50, 000 total face...

On august 1 2005, airbus Ltd. (a company that records adjusting entries only once per year) issued bonds with the following characteristics:
Sh.50, 000 total face value.
12% stated rate.
16% yield rate.
Interest dates are February 1, May 1, August 1, and November 1.
Bond date is October 31, 2004.
Maturity date is November 1, 2009.
Sh.1, 000 of bond issue costs were incurred.

Required:
1) Provide all entries required for the bond issue through February 1, 2006, for Airbus using the interest method.
2) On June 1, 2007, Airbus retired Sh.20, 000 of bonds at 98 through open market purchase. Provide the entries to update the bond issue and to retire the bonds using the interest method.
3)Provide the entries required on August 1, 2007, under the following methods of discount amortization:
i) Interest method
ii) Straight-line method

Answers

Question1

1/8/2005- issue bonds and incur issue costs:
Bonds issue cost 1,000
Cash 1,000

Cash 43,917
Discount on bonds payable 6,083
Bonds payable 50,000
(50,000 x PVI, 4%, 17) + (0.03 x 50,000 x PVA, 4%, 17) = 43,917

1/11/2005- interest payment date:
Interest expense 1,757
Discount on bonds payable 257
Cash 1,500
Bonds issue expense 59
Bonds issue cost 59
(1,757 = 43,917*.04.) (1,500 = 50,000*0.03) (59 = 1000/17)

1/12/2005- adjusting entry:

Interest expense 1,178
Discount on bonds payable 178
Interest payable 1,000
Bonds issue expense 39
Bonds issue cost 39
(1,178 = 43,917+257)*0.04*2/3) (1,000 = 1,500*2/3) (39 = 59*2/3)

1/2/2006
Interest expense 589
Interest payable 1,000
Discount on bonds payable 89
Cash 1,500
Bonds issue expense 20
Bonds issue cost 20
(589 = (43,917 + 257)*0.04*1/3) (20 = 59*1/3)

Question 2

On May 1, 2007, the remaining term of the bond is two and one-half years, or 10 quarters, and the Sh.20, 000 of bonds to be retired have the following value:
Sh.18, 378 = Sh.20, 000*PVI, 4%, 10 + (Sh.20, 000*0.03*PVA, 4%, 10)

On May 1, 2007, the remaining discount on the portion of the bonds to be retired is therefore Sh.1, 622 (Sh.20, 000-Sh.18, 378).

1/6/2007- update relevant bond accounts before retirement:
Interest expense 245
Discount on bonds payable 45
Cash 200
Bonds issue expense 8
Bonds issue cost 8

1/6/2007- removes relevant bond accounts:
Bonds payable 20,000
Extraordinary loss, bond extinguishment 1,404
Discount on bonds payable 1,577
Bonds issue cost 227
Cash (0.98*Sh.20, 000) 19,600

Sh.245 = 18,378*0.04*1/3; Sh.200 = 20,000*0.03*1/3; Sh.8 = 1,000*1/17/1/3*0.4;
Sh.1, 577 = 1,622-45

Question 3

On May 1, 2007, the remaining term of the bonds is two and one-half years, or 10 quarters, and the remaining Sh.30, 000 of bonds have the following book value:

Sh.27, 567 = Sh.30, 000*PVI, 4%, 10 + Sh.30, 000*PVA, 4%, 10.

On May 1, 2007, the remaining discount is therefore Sh.2, 433 (Sh.30, 000 - Sh.27, 567).
1/8/2007- interest payment date.

Interest expense 1,103
Discount on bonds payable 203
Cash 900
Bonds issue expense 35
Bonds issue cost 35
Sh.1, 103 = Sh.27, 567*0.04; Sh.900 = Sh.30, 000*.03; Sh.35 = 0.60*1,000/17.

Under SL method, the discount is amortized Sh.358*6,083/17 per quarter on the entire bond issue.

1/8/2007- interest payment date:
Interest expense 1,115
Discount on bonds payable 215
Cash 900
Bonds issue expense 35
Bonds issue cost 35
Sh.215 = 358*0.6

Carolinemakenamutwiri answered the question on December 12, 2018 at 07:08

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