Accounting for Bonds: Journal Entries, Amortization, and Analysis

This assignment delves into the intricacies of bond accounting, providing a comprehensive analysis of journal entries and amortization schedules. The student analyzes a case involving two bonds, Bond A and Bond B, issued by a company. The assignment addresses the importance of correct journal entries, especially when bonds are issued at a premium or discount. It highlights the mistakes made by a junior accountant and provides corrected journal entries, including the amortization schedule for Bond B. Furthermore, the assignment emphasizes the need for adjusting entries at the year-end to reflect any outstanding interest payable, thus ensuring accurate financial reporting. The document covers the recording of interest payments, amortization of bond premiums or discounts, and the correct treatment of accrued interest, offering a practical guide to bond accounting principles. This assignment provides a detailed understanding of the procedures needed to accurately reflect liabilities related to bonds in annual financial reports.

ACCOUNTING
STUDENT ID:
[Pick the date]

Question 4
PART A
The requisite amortization schedule for Bond A is given below.
Explanation
 Cash paid = 10.5% *$2000,000 = $210,000
 Interest expense = 10%*Carrying value of bonds
 Amortization = Cash paid – Interest Expense
 Carrying value of the bonds = Carrying value of the bond at previous date –
Amortization
PART B
From: STUDENT NAME
To: Jack (Supervisor)
Date: 19th December, 2019
Dear Jack
I have reviewed the three sets of journal entries which have been prepared by Kate (Junior
Accountant) with regards to various bonds issued by ABC and come across some issues.
Apparently, Kate had made some mistakes which have been rectified.
(i)Reasons for Mistakes
Kate failed to take into consideration the interest payment for Bond A which would have
happened on January 1, 2020 and thereby would have required a journal entry similar to those
that have been recorded for Bond B interest payment. Also, considering that the Bond A was

issued at premium to the par value, hence entry regarding the amortization of bond would
also be recorded at the end of interest payment. Further, she has also disregarded the
adjusting entry required for bond B at the end of the year i.e. December 31, 2020 as there
would be some interest outstanding in relation to the three month duration i.e. October1,2020
to December 31, 2020. It is imperative that the interest payable on Bond B should have been
recorded as a current liability. Besides, Bond B has been issued at discount and hence
amortization adjustment would happen on every interest payment date which has not been
reflected by Kate. Finally, the adjusting entry for bond A on the interest accrued from
January 2, 2020 to December 31, 2020 also seems to be missing.
(ii) Proper procedure to record the bonds of ABC
At the time of issue of bonds, it is imperative to consider if they are issued at par value or at
premium/discount. If the issuance takes place at premium or discount, then amortization
needs to be carried out at every interest payment. Thus, journal entry at the time of each
interest payment date must not only reflect interest payment but subsequent amortization.
Further, an adjusting entry at the year end is required in order to reflect any interest payable
on the outstanding bonds from the last interest payment date as current liabilities. This leads
to appropriate reflection of liabilities related to bonds in the annual report which allows
prudent decision making on the part of the external users.
(iii) Correcting Journal Entries
In order to obtain the correcting journal entries, the amortization schedule for bond B is
required on similar lines as obtained for bond A. This is indicated below.
The corrected journal entries are as follows.

(iv) Journal entries to be prepared by Kate as on December 31, 2020
The appropriate adjusting entries to be entered on December 31, 2020 are highlighted below.
In case of any further queries or detailed explanation, feel free to contact me.
Yours Sincerely
STUDENT NAME