WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
10-1 Westmont College
 Exercise 1
Flores Company publishes a monthly sports magazine,
Hunting Preview. Subscriptions to the magazine cost $20
per year. During October 2017, Flores sells 18,000
subscriptions beginning with the November issue. Flores
prepares financial statements quarterly and recognizes
subscription revenue earned at the end of the quarter.
The company uses the accounts Unearned Subscriptions
and Subscription Revenue.
Instructions
(a) Prepare the entry in October for the receipt of the
subscriptions.
(b) Prepare the adjusting entry at December 31, 2017, to
record subscription revenue earned in December 2017.
(c) Prepare the adjusting entry at March 31, 2018, to record
subscription revenue earned in the first quarter of 2018.
10-2 LO 4
 Exercise 2
English Company billed its customers a total
of $1,890,000 for the month of November.
The total includes a 5% sales tax.

Instructions
(a)Determine the proper amount of sales
revenue to report for the month.
(b)Prepare the general journal entry to record
the sales revenue and related liabilities for
the month.

10-3 LO 4
 Reminder 1

TES 4 – Bobot 5%
Lihat Situs Kuliah

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 Non-Current Liabilities
Learning Objective 4
Obligations that are expected to be paid Explain why bonds are
issued, and identify the
more than one year in the future. types of bonds.

Bond Basics
 A form of interest-bearing notes payable.

 To obtain large amounts of long-term capital.

Three advantages over ordinary shares:

1. Shareholder control is not affected.

2. Tax savings result.

3. Earnings per share may be higher.

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LO 4
 Bond Basics

Effects on earnings per share—equity vs. debt.

Illustration 10-7
Effects on earnings per share—equity vs. debt

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 Bond Basics

TYPES OF BONDS

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 Bond Basics

ISSUING PROCEDURES
 Government laws grant corporations power to issue
bonds.

 Board of directors and shareholders must approve bond

issues.

 Board of directors must stipulate number of bonds to be

authorized, total face value, and contractual interest rate.

 Terms of the bond are set forth in a legal document

called a bond indenture.

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 Bond Basics

ISSUING PROCEDURES
 Represents a promise to pay:

► face value at designated maturity date, plus

► periodic interest at a contractual (stated) interest rate

on the maturity amount (face value).

 Interest payments usually made semiannually.

 Generally issued when the amount of capital needed is

too large for one lender to supply.

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 Illustration 10-8
Bond certificate

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 Bond Basics

BOND TRADING
 Bondholders can sell their bonds, at any time, at the
current market price on national securities exchanges.

 Bond prices are quoted as a percentage of the face value.

 Newspapers and the financial press publish bond prices

and trading activity daily.

Illustration 10-9
Market information for bonds

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 Bond Basics

BOND TRADING
 Bondholders can sell their bonds, at any time, at the
current market price on national securities exchanges.

 Bond prices are quoted as a percentage of the face value.

 Newspapers and the financial press publish bond prices

and trading activity daily.

 A corporation makes journal entries only when it issues or

buys back bonds, or when bondholders exchange
convertible bonds into ordinary shares.

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 Determining the Market Price of a Bond

The current market price (present value) of a bond is a

function of three factors:
1. the dollar amounts to be received,

2. the length of time until the amounts are received, and

3. the market rate of interest.

The process of finding the present

value is referred to as discounting the
future amounts.

10-13 LO 4
 Determining the Market Price of a Bond

Illustration: Assume that Acropolis SA on January 1, 2017, issues

€100,000 of 9% bonds, due in five years, with interest payable
annually at year-end.
Illustration 10-10
Time diagram
depicting cash flows

Illustration 10-11
Computing the market price of bonds
10-14 LO 4
 Accounting for Bond Issues
Learning Objective 5
Prepare the entries for the
A corporation records bond transactions issuance of bonds and
interest expense.
when it
 issues (sells) or redeems (buys back) bonds and
 when bondholders convert bonds into ordinary shares.

Bonds may be issued at

 face value,
 below face value (discount), or
 above face value (premium).
Bond prices are quoted as a percentage of face value.
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 ISSUING BONDS AT FACE VALUE

Illustration: On January 1, 2017, Candlestick AG issues €100,000,

five-year, 10% bonds at 100 (100% of face value). The entry to
record the sale is:

Jan. 1 Cash 100,000

Bonds Payable 100,000

Prepare the entry Candlestick would make to accrue interest on

December 31 (€100,000 x 10%).

Dec. 31 Interest Expense 10,000

Interest Payable 10,000

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 ISSUING BONDS AT FACE VALUE

Prepare the entry Candlestick would make to pay the interest on

Jan. 1, 2018.

Jan. 1 Interest Payable 10,000

Cash 10,000

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 DISCOUNT OR PREMIUM ON BONDS

Issue at Par, Discount, or Premium?

Illustration 10-12
Interest rates and bond prices

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 ISSUING BONDS AT A DISCOUNT

Illustration: Assume that on January 1, 2017, Candlestick AG

sells €100,000, five-year, 10% bonds for €98,000 (98% of face
value). Interest is payable annually on January 1. The entry to
record the issuance is as follows.

Jan. 1 Cash 98,000

Bonds Payable 98,000

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 ISSUING BONDS AT A DISCOUNT
Illustration 10-13
Statement Presentation Statement presentation of
discount on bonds payable

The issuance of bonds below face value—at a discount—causes the

total cost of borrowing to differ from the bond interest paid.
The issuing company must pay not only the contractual interest rate
over the term of the bonds but also the face value (rather than the
issuance price) at maturity.

10-20 LO 5
 Total Cost of Borrowing Illustration 10-14
Computation of total cost
of borrowing—bonds
issued at discount

Illustration 10-15
10-21 Alternative computation of total cost of borrowing—bonds issued at discount LO 5
 ISSUING BONDS AT A DISCOUNT

Amortization of bond discount:

 Allocated to expense in each period.
 Increases the amount of interest expense reported each
period.
 Amount of interest expense reported each period will
exceed the contractual amount paid.
 As the discount is amortized, its balance declines.
 The carrying value of the bonds will increase, until at
maturity the carrying value of the bonds equals their
face amount.
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 ISSUING BONDS AT A PREMIUM

Illustration: Assume that the Candlestick AG bonds previously

described sell for €102,000 (102% of face value) rather than for
€98,000. The entry to record the sale is as follows:

Jan. 1 Cash 102,000

Bonds Payable 102,000

10-23 LO 5
 ISSUING BONDS AT A PREMIUM

Statement Presentation Illustration 10-17

Statement presentation of
bonds issued at a premium

Sale of bonds above face value causes the total cost of borrowing to
be less than the bond interest paid.
The borrower is not required to pay the bond premium at the maturity
date of the bonds. Thus, the bond premium is considered to be a
reduction in the cost of borrowing.

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 Total Cost of Borrowing Illustration 10-18
Total cost of borrowing—
bonds issued at a
premium

Illustration 10-19
Alternative computation of total cost of borrowing—bonds issued at a premium

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 ISSUING BONDS AT A PREMIUM

Amortization of bond premium:

 Allocated to expense in each period.
 Decreases the amount of interest expense reported
each period.
 Amount of interest expense reported each period will be
less than the contractual amount paid.
 As the premium is amortized, its balance declines.
 The carrying value of the bonds will decrease, until at
maturity the carrying value of the bonds equals their
face amount.
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 > DO IT!

Giant Ltd. issues ¥200,000,000 of bonds for ¥189,000,000.

(a) Prepare the journal entry to record the issuance of the bonds,
and (b) show how the bonds would be reported on the statement of
financial position at the date of issuance.

(a) Cash 189,000,000

Bonds Payable 189,000,000

(b) Non-current liabilities

Bonds payable ¥189,000,000

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 REDEEMING BONDS AT MATURITY
Learning Objective 6
Describe the entries when
Candlestick AG records the redemption of its bonds are redeemed.
bonds at maturity as follows:

Bonds Payable 100,000

Cash 100,000

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 REDEEMING BONDS BEFORE MATURITY

When a company retires bonds before maturity, it is

necessary to:
1. eliminate the carrying value of the bonds at the
redemption date;

2. record the cash paid; and

3. recognize the gain or loss on redemption.

The carrying value of the bonds is the face value of the

bonds less unamortized bond discount or plus unamortized
bond premium at the redemption date.

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 REDEEMING BONDS BEFORE MATURITY

Illustration: Assume at the end of the fourth period, Candlestick AG

having sold its bonds at a premium, retires the bonds at 103 after
paying the annual interest. Assume that the carrying value of the
bonds at the redemption date is €100,476. Candlestick records the
redemption at the end of the fourth interest period (January 1,
2021) as follows:

Jan. 1 Bonds Payable 100,476

Loss on Bond Redemption 2,524
Cash 103,000

10-30 LO 6
 > DO IT!

R & B Inc. issued £500,000, 10-year bonds at a discount. Prior to

maturity, when the carrying value of the bonds is £496,000, the
company redeems the bonds at 98. Prepare the entry to record the
redemption of the bonds.

Solution
There is a gain on redemption. The cash paid, £490,000 (£500,000 ×
98%), is less than the carrying value of £496,000. The entry is:

Bonds Payable 496,000

Gain on Bond Redemption 6,000
Cash 490,000

10-31 LO 6
 Exercise 3
On January 1, 2017, Beltway Enterprises
issued 9%, 5-year bonds with a face
amount of €700,000 at par. Interest is
payable semiannually on June 30 and
December 31.

Instructions
Prepare the entries to record the issuance
of the bonds and the first semiannual
interest payment.

10-32
 Exercise 4
On January 1, 2017, Kentwood Company
issued bonds with a face value of $800,000.
The bonds carry a stated interest of 7%
payable each January 1 and July 1.

Instructions
a. Prepare the journal entry for the
issuance assuming the bonds are issued at 97.
b. Prepare the journal entry for the
issuance assuming the bonds are issued at
102.

10-33
 Exercise 5
On July 1, 2017, Frodo Corporation issued
$600,000, 6%, 10-year bonds at face value.
Interest is payable semiannually on January
1 and July 1. Frodo Corporation has a
calendar year end.

Instructions
Prepare all entries related to the bond issue
for 2017.

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 Exercise 6 (0.5-Point Score Guarantee)
On January 1, 2017, Zooland Enterprises
sold 8%, 20-year bonds with a face amount
of $1,000,000 for $960,000. Interest is
payable semiannually on July 1 and
January 1.

Instructions
Calculate the carrying value of the bond at
December 31, 2017 and 2018.

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 Exercise 7
Delta Company issued bonds with a face
amount of $1,500,000 in 2010. As of
January 1, 2016, the unamortized discount
on bonds payable is $4,800. At that time,
Delta redeemed the bonds at 101.

Instructions
Assuming that no interest is payable, make
the entry to record the redemption.

10-36
 Reminder 2

TES 4 – Bobot 5%
Lihat Situs Kuliah
Materi :
• Pertemuan 8 (Liabilitas Lancar)
• Pertemuan 9 (Utang Obligasi)

10-37
 Copyright

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