[Minder86]

Hi there, Im interested in starting a program in accounting at ubc. I was not sure what I wanted to do but found accounting interesting. I had a hard time figuring this out. I needed help with the answer :

On otctober 1, 2007, fpo Corp, issued $600,000 of 10 year, 6% bonds at 98. The bonds pay interest annually on otctober 1. FPO's year end is September 30.

1. record the issue of the bonds on October 1, 2007.

2. record the accrual of interest on September 30, 2008, assuming the amortization amount is $2,127.

3. record the payment of interest on October 1, 2008

4. assume that on October 1, 2008, after payment of the interest, FPO redeems all of the bonds at 102. Record the redemption on the bonds.

This is the answers that I have. If you see anythign wrong with it. Let me know and please let me know how to solve this question

my answers :

1. cash (600,000 x 98%) 588,000
discount on bonds payable 12,000
bonds payable 600,000

2. Interest Expense (36,000 + 2,127) 38,127
Discount on Bonds Payable 2,127
Cash (6% x 600,000 x 12/12) 36,000

After that I wasn't sure.

[morgaine300]

Hi there, Im interested in starting a program in accounting at ubc. I was not sure what i wanted to do but found accounting interesting.

As long as you don't think bonds is what you'll be doing if you go into accounting... :D

1. cash (600,000 x 98%) 588,000
discount on bonds payable 12,000
bonds payable 600,000

Please put Dr and Cr on each line because otherwise we don't know what is what. The cash and discount are Dr, and the payable is Cr. As long as that's what you meant to do, then it's correct.

2. Interest Expense (36,000 + 2,127) 38,127
Discount on Bonds Payable 2,127
Cash (6% x 600,000 x 12/12) 36,000

Almost... except that interest isn't paid until October 1, the next day. It says to accrue the interest expense. If you aren't paying it until the next day, where does cash come in? Where do you put things that you accrued but have not yet paid?

You can't do (3) until you get (2) correct, because you're now going to be paying it and it has to get recorded correctly first.

(4) -- You already know what the 102 since you did the 98 correctly. You need to know carrying value first. If you had a 12,000 discount to start, and you amortized 2127 of it, what is your current discount? After you get that, what will be the carrying value? (Carrying value = bond face value either plus premium or minus discount.) Then compare the carrying value to the 102 you redeemed them at for your gain or loss. Give that a try.

[Minder86]

Oh oaky. Hhmm yeah I see that. But I'm kind of confused on what the answer for number 2 is. I still don't get what it would be then in that case for number 2

[morgaine300]

Interest Payable instead of Cash. If you have accrued an expense and haven't paid it yet, it is always something payable, with an appropriate word on it. (Income tax payable, dividend payable, etc. in this case interest payable since that's what it is.)