The annual accounting period ends December 31. The bonds were issued at 104 on J
ID: 2410697 • Letter: T
Question
The annual accounting period ends December 31. The bonds were issued at 104 on January 1, 2015, when the market interest rate was 9.5 percent. Assume the company uses effective-interest amortization and adjusts for any rounding errors when recording interest expense in the final year.
Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
Prepare the journal entries to record the payment of interest on December 31, 2015 and 2016. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Round your answers to the nearest whole dollar.)
How much interest expense would be reported on the income statements for 2015 and 2016? (Round your answers to the nearest whole dollar.)
Compute the bond value which should be reported on the balance sheets at December 31, 2015 and 2016. (Round your intermediate calculations and final answers to the nearest whole dollar.)
Explanation / Answer
Answer
Bond issue price = $ 1,080,000 x 1045 = $ 1,123,200
Period
Cash payment
Interest expense
Premium on Bonds payable
Carrying Value of Bond
[A = 1080000 x 10.5%]
[B = D x 9.5%]
[C = B – A]
[D = D +C]
Issued 2015
$ 43,200.00 [1080000 x 4%]
$ 11,23,200.00
Year 1 end 2015
$ 1,13,400.00
$ 1,06,704.00
$ (6,696.00)
$ 11,16,504.00
Year 2 end 2016
$ 1,13,400.00
$ 1,06,068.00
$ (7,332.00)
$ 11,09,172.00
Date
Accounts titles
Debit
Credit
01-Jan
Cash
$ 11,23,200.00
Premium on Bonds payable
$ 43,200.00
Bonds payable
$ 10,80,000.00
Date
Accounts titles
Debit
Credit
31-Dec-15
Interest expense
$ 1,06,704.00
Premium on Bonds payable
$ (6,696.00)
Cash
$ 1,13,400.00
31-Dec-16
Interest expense
$ 1,06,068.00
Premium on Bonds payable
$ 7,332.00
Cash
$ 1,13,400.00
Bond’s value to be reported on Balance Sheet on 31 Dec 2015 and 31 Dec 2016 = $ 1,080,000.00
Period
Cash payment
Interest expense
Premium on Bonds payable
Carrying Value of Bond
[A = 1080000 x 10.5%]
[B = D x 9.5%]
[C = B – A]
[D = D +C]
Issued 2015
$ 43,200.00 [1080000 x 4%]
$ 11,23,200.00
Year 1 end 2015
$ 1,13,400.00
$ 1,06,704.00
$ (6,696.00)
$ 11,16,504.00
Year 2 end 2016
$ 1,13,400.00
$ 1,06,068.00
$ (7,332.00)
$ 11,09,172.00
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