Watson
Corporation issued $500,000 of 8%, 10-year bonds on January 1, 2011, at face
value. The note requires annual interest payments each December 31. Costs
associated with the bond issuance were $25,000. Watson follows private
enterprise GAAP and uses the straight-line method to amortize bond issue costs.
Prepare the journal entry for
(a)
The January 1, 2011 issuance and
(b)
The December 31, 2011 interest payment and bond issuance cost amortization.
(c)
What are the general principles surrounding accounting for transaction costs
associated with the issue of note or bonds?
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(a)
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Cash
($500,000 – $25,000)...............................................
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475,000
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Bonds Payable........................................................
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475,000
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(b)
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Interest
Expense ($40,000* + $2,500**)..........................
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42,500
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Bonds Payable........................................................
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2,500
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Cash*........................................................................
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40,000
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*
$500,000 X 8% = $40,000
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**
$25,000 issue cost X 1/10 = $2,500
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(c) When a note or bond is issued, it should
be recognized at the fair value adjusted by any directly attributable issue
costs. However, note that where the liabilities will subsequently be measured
at fair value (e.g., under the fair value options or because they are
derivatives), the transaction costs should not be included in the initial
measurement (i.e., the costs should be expensed) [CICA Handbook, Part
II, Section 3856.07 and IAS 39.43].
