Instructions for Project 2.1 Journal Entries for Bonds

Project Instructions

• There are three exercises in this Project 2.1; Journal Entries for Bonds Part 1, Journal Entries for Bonds Part 2, and Journal Entries for Bonds Part 3.

• Please read the following instructions and review the table carefully. Then, enter answers for journal items ([A] to [Q] for Part 1, [A] to [M] for Part 2 and [A] and [W] for Part 3) in the next three items in this Lesson, called Project 2.1 Journal Entries for Bonds Part 1, Project 2.1 Journal Entries for Bonds Part 2, and Project 2.1 Journal Entries for Bonds Part 3.

• You may keep these instructions open in a separate browser or download the instructions as a PDF, and open it as you work through the exercise.

• For specific layout of the balance sheet, please refer to the file below.

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Instructions4Project-2-1DOCX File

The Balance Sheet of the Illini as of 12/31/20X0:

	Illini Company, Inc.
	Balance Sheet
	as of 12/31/20X0
	Assets
Current assets:
Cash		$1,500,000
Accounts receivable, net		18,000
Inventory		50,000
Total current assets		1,568,000
Equipment		90,000
Goodwill		20,000
Total assets		$1,678,000
	Liabilities and shareholders' equity
Shareholders' equity:		$20,000
Common stock, 20,000 shares outstanding, $1 par		280,000
Additional paid-in capital		1,378,000
Retained earnings		1,678,000
Total shareholders' equity
Total shareholders' equity		$1,678,000

Note that all additional paid-in capital (APIC) sub accounts (e.g., APIC-options and APIC-treasury stock), if any, are tracked in the “Additional paid-in capital” account on the Balance Sheet.

Project 2.1 Topic: Bonds Part 1

• On 1/1/20X1, Illini issues 10% bonds dated 1/1/20X1, with a face amount of $60,000. The bonds mature on 12/31/20X4 (4 years). For bonds of similar risk and maturity, the market yield is 8%. Interest is paid semiannually on June 30 and December 31. Illini incurs a total of $2,000 debt issuance costs. After its third interest payment on 6/30/20X2, Illini buys back the bonds on the market for $61,000.

Project 2.1 Part 1 Journal Entries

Date	Account Name (Debit)	Account Name (Credit)	Debit	Credit
1/1/20X1	Cash		[A]
		Bonds payable		[B]
		Premium on bonds		[C]
		Cash		[D]
6/30/20X1	Interest expense		[E]
	Premium on bonds		[F]
		Cash		[G]
12/31/20X1	Interest expense		[H]
	Premium on bonds		[I]
		Cash		[J]
6/30/20X2	Interest expense		[K]
	Premium on bonds		[L]
		Cash		[M]
6/30/20X2	Bonds payable		[N]
	Premium on bonds		[O]
		Cash		[P]
		Gain		[Q]

Project 2.1 Topic: Bonds Part 2

• On 1/1/20X1, Illini issues $20,000 face amount 10% ordinary convertible bonds maturing 12/31/20X3. The bonds are issued at the face amount. Interest is paid semiannually on June 30 and December 31. Each $25 bond can be converted into one share of $1 par common stock of Illini. On 1/1/20X2, half of the convertible bonds are converted into Illini’s common stock.

Project 2.1 Part 2 Journal Entries

Date	Account Name (Debit)	Account Name (Credit)	Debit	Credit
1/1/20X1	Cash		[A]
		Bonds payable		[B]
6/30/20X1	Interest expense		[C]
		Cash		[D]
12/31/20X1	Interest expense		[E]
		Cash		[F]
1/1/20X2	Bonds payable		[G]
		Common stock		[H]
		APIC		[I]
6/30/20X2	Interest expense		[J]
		Cash		[K]
12/31/20X2	Interest expense		[L]
		Cash		[M]

Project 2.1 Topic: Bonds Part 3

• On 1/1/20X1, Illini issued 10% bonds dated 1/1/20X1, with a face amount of $40,000. The bonds mature on 12/31/20X4 (4 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Suppose Illini elects the fair value option to account for these (and only these) bonds and adjust for the fair value changes on every June 30 and December 31. The market interest rates for bonds of similar risk and maturity on 6/30/20X1, 12/31/20X1, 6/30/20X2, and 12/31/20X2 are 10%, 8%, 12%, and 15% respectively. All interest rate changes are due to Illini’s own credit risk changes.

Project 2.1 Part 3 Journal Entries

Date	Account Name (Debit)	Account Name (Credit)	Debit	Credit
1/1/20X1	Cash		[A]
	Discount on bonds		[B]
		Bonds payable		[C]
6/30/20X1	Interest expense		[D]
		Discount on bonds		[E]
		Cash		[F]
6/30/20X1	Unrealized holding gain/loss-OCI		[G]
		Fair value adjustment		[H]
12/31/20X1	Interest expense		[I]
		Discount on bonds		[J]
		Cash		[K]
12/31/20X1	Unrealized holding gain/loss-OCI		[L]
		Fair value adjustment		[M]
6/30/20X2	Interest expense		[N]
		Discount on bonds		[O]
		Cash		[P]
6/30/20X2	Fair value adjustment		[Q]
		Unrealized holding gain/loss-OCI		[R]
12/31/20X2	Interest expense		[S]
		Discount on bonds		[T]
		Cash		[U]
12/31/20X2	Fair value adjustment		[V]
		Unrealized holding gain/loss-OCI		[W]

Note: When entering answers to numerical questions in the exercises, please round your answer to the nearest dollar except for basic and diluted EPS. For basic and diluted EPS, please round your answer to the nearest cent (i.e., x.xx). For negative amounts, please enter the negative sign directly in front of the number, with no space (i.e., -x or -x.xx).

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