1. Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet
Chapter 11

2. P11-29B Analyzing and journalizing bond transactions
On March 1, 2012, Professors Credit Union (PCU) issued 6%, 20-year bonds payable with maturity value of $500,000. The bonds pay interest on February 28 and August 31. PCU amortizes bond premium and discount by the straight-line method.
The issue price of the bonds is 97. Journalize the following bond transactions:
Issuance of the bonds on March 1, 2012.
Payment of interest and amortization of discount on August 31, 2012.
Accrual of interest and amortization of discount on December 31, 2012.
Payment of interest and amortization of discount on February 28, 2013.

3. The issue price of the bonds is 97
The issue price of the bonds is 97. Journalize the following bond transactions: a. Issuance of the bonds on March 1, 2012.
2012
Mar 1
Cash ($500,000 × .97)
485,000
Discount on bonds payable
15,000
($500,000 - $485,000)
Bonds payable
500,000
Issued bonds payable at a discount. 

4. Payment of interest and amortization of discount on August 31, 2012.
Interest expense ($375 + $15,000)
15,375
Discount on bonds payable
375
($15,000 x 1/20 x 6/12)
Cash ($500,000 x 6% x 6/12)
15,000
Paid interest and amortized discount. 

5. Accrual of interest and amortization of discount on December 31, 2012.
Interest expense ($250 + $10,000)
10,250
Discount on bonds payable
($15,000 x 1/20 x 4/12)
250
Interest payable
($500,000 x 6% x 4/12)
10,000
Accrued interest and amortized discount.

6. Payment of interest and amortization of discount on February 28, 2013.
Feb 28
Interest payable (from Dec 31)
10,000
Interest expense ($125 + $15,000 - $10,000)
5,125
Discount on bonds payable
125
($15,000 x 1/ 20 × 2/12)
Cash ($500,000 x 6% x 2/12)
15,000
Paid interest and amortized discount.

8. What is the maturity value of the bonds?
Maturity value is $700,000.
What is the carrying amount of the bonds at December 31, 2012?
Carrying amount at December 31, 2012 is $616,000.

9. What is the annual cash interest payment on the bonds?
Annual cash interest payment is $63,000
($700,000 × 9% x 12/12)
How much interest expense should the company record each year?
Annual interest expense is $73,500 [$63,000 + annual
discount amortization of $10,500.
($105,000* x 1/10 years x 12/12)]
___________
*Total discount on bonds payable $700,000 – ($700,000 x .85) = $105,000

10. 2. Record the June 30, 2013, semiannual interest payment and amortization of discount.
Jun 30
Interest expense ($31,500 + $5,250)
36,750
Discount on bonds payable
5,250
($105,000 x 1/10 x 6/12)
Cash ($700,000 x 9% x 6/12)
31,500
Paid interest and amortized discount.

11. 3. What will be the carrying amount of the bonds at December 31, 2013?
Carrying amount at December 31, 2013 is $626,500*
__________
*$616,000 + $5,250 (Jun 30) + $5,250 (Dec 31) = $626,500

12. P11-31B Journalizing and reporting bond transactions
The board of directors of Theta Health Spa authorizes the issuance of $450,000 of 10%, 10-year bonds payable. The semiannual interest dates are May 31 and November 30. The bonds are issued on July 31, 2012, at par plus accrued interest.
Requirements
Journalize the following transactions:
Issuance of the bonds on July 31, 2012.
Payment of interest on November 30, 2012.
Accrual of interest on December 31, 2012.
Payment of interest on May 31, 2013.
Report interest payable and bonds payable as they would appear on the Theta balance sheet at December 31, 2012.

13. P11-31B Journalizing and reporting bond transactions
The board of directors of Theta Health Spa authorizes the issuance of $450,000 of 10%, 10-year bonds payable. The semiannual interest dates are May 31 and November 30. The bonds are issued on July 31, 2012, at par plus accrued interest.
Issuance of the bonds on July 31, 2012.
Jul 31
Cash ($450,000 + $7,500)
457,500
Bonds payable
450,000
Interest payable
7,500
($450,000 × 10% × 2/12)
Issued bonds payable 2 months after the date of the bonds.

14. P11-31B Journalizing and reporting bond transactions
The board of directors of Theta Health Spa authorizes the issuance of $450,000 of 10%, 10-year bonds payable. The semiannual interest dates are May 31 and November 30. The bonds are issued on July 31, 2012, at par plus accrued interest.
Payment of interest on November 30, 2012.
Nov 30
Interest payable (from July 31)
7,500
Interest expense
15,000
($450,000 × 10% × 4/12)
Cash
($450,000 × 10% × 6/12)
22,500
Paid interest.

15. P11-31B Journalizing and reporting bond transactions
The board of directors of Theta Health Spa authorizes the issuance of $450,000 of 10%, 10-year bonds payable. The semiannual interest dates are May 31 and November 30. The bonds are issued on July 31, 2012, at par plus accrued interest.
Accrual of interest on December 31, 2012.
Dec 31
Interest expense
3,750 
($450,000 × 10% × 1/12)
Interest payable
3,750
Accrued interest.

16. P11-31B Journalizing and reporting bond transactions
The board of directors of Theta Health Spa authorizes the issuance of $450,000 of 10%, 10-year bonds payable. The semiannual interest dates are May 31 and November 30. The bonds are issued on July 31, 2012, at par plus accrued interest.
Payment of interest on May 31, 2013.
2013
May 31
Interest payable (from Dec. 31)
3,750
Interest expense
18,750
($450,000 × 10% × 5/12)
Cash
($450,000 × 10% × 6/12)
22,500
Paid interest.

17. P11-31B Journalizing and reporting bond transactions
The board of directors of Theta Health Spa authorizes the issuance of $450,000 of 10%, 10-year bonds payable. The semiannual interest dates are May 31 and November 30. The bonds are issued on July 31, 2012, at par plus accrued interest.
Report interest payable and bonds payable as they would appear on the Theta balance sheet at December 31, 2012.
At December 31, 2012:
Current liabilities:
Interest payable
$ 3,750
Long-term liabilities:
Bonds payable
$450,000