On January 1, 2014, Moss Company acquires $300,000 of Adam Company\'s 10-year, 1
ID: 2416943 • Letter: O
Question
On January 1, 2014, Moss Company acquires $300,000 of Adam Company's 10-year, 10% bonds at a price of $319,254 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity.
1. Assuming that Moss Company uses the effective-interest method, prepare a 3-year schedule of interest revenue and bond premium amortization.
2. Prepare the journal entry for the interest receipt of December 31, 2014 and the premium amortization under the effective-interest method.
3. Assuming that Moss Company uses the straight-line method, prepare a 3-year schedule of interest revenue and bond premium amortization.
4. Prepare the journal entry for the interest receipt of December 31, 2014 and the premium amortization under the straight-line method.
5. At December 31, 2016, which method provides a larger investment on the balance sheet? Which method shows more interest income on the income statement?
Explanation / Answer
Given:
Face Value
300000
Interest (Coupon rate)
10%
0.1
Market interest
9%
0.09
A
B
C
D
E
F
G
Date
Interest Payment (Stated 10% * Face value)
Interest Expenses (Market rate of 9% * Previous Bond value in G)
Amortization of Bond Premium (C-B)
Credit Balance in Bond Premium Account
Credit Balance in Bonds Payable account
Book value of Bonds (F+E)
Credit Cash
Debit Interest Expense
Debit Bond Premium
01-01-14
-
-
-
$ 19,254.00
$ 300,000.00
$ 319,254.00
31-12-14
$ 30,000.00
$ 28,732.86
$ (1,267.14)
$ 17,986.86
$ 300,000.00
$ 317,986.86
31-12-15
$ 30,000.00
$ 28,618.82
$ (1,381.18)
$ 16,605.68
$ 300,000.00
$ 316,605.68
31-12-16
$ 30,000.00
$ 28,494.51
$ (1,505.49)
$ 15,100.19
$ 300,000.00
$ 315,100.19
Date
Account Name
Debit
Credit
01-01-14
Cash a/c
319254
Bond Payable
300000
Premium on Bonds Payable
19254
31-12-14
Interest Expense
27248
Premium on Bond Payable
2752
Cash
30000
Face Value= 300000
Interest = 0.1
Market interest = 0.09
A
B
C
D
E
F
Date
Interest Expenses (30000-1925) / 10
Amortization of Bond Premium (319254-300000) / 10
Credit Balance in Bond Premium Account
Credit Balance in Bonds Payable account
Book value of Bonds (D+E)
Debit Interest Expense
Debit Bond Premium
01-01-14
-
-
$ 19,254
$ 300,000
$ 319,254
31-12-14
$ 28,075
$ 1,925
$ 17,329
$ 300,000
$ 317,329
31-12-15
$ 28,075
$ 1,925
$ 15,403
$ 300,000
$ 315,403
31-12-16
$ 28,075
$ 1,925
$ 13,478
$ 300,000
$ 313,478
Date
Account Name
Debit
Credit
01-01-14
Cash a/c
319254
Bond Payable
300000
Premium on Bonds Payable
19254
31-12-14
Interest Expense
28075
Premium on Bond Payable
1925
Cash
30000
Method
Date
Interest Expenses
Book value of
Effective-interest method
31-12-16
$ 28,495
$ 315,100
Straight-line method
31-12-16
$ 28,075
$ 313,478
Note: Both Interest income and Bond value are high in Effective Interest Method
Given:
Face Value
300000
Interest (Coupon rate)
10%
0.1
Market interest
9%
0.09
A
B
C
D
E
F
G
Date
Interest Payment (Stated 10% * Face value)
Interest Expenses (Market rate of 9% * Previous Bond value in G)
Amortization of Bond Premium (C-B)
Credit Balance in Bond Premium Account
Credit Balance in Bonds Payable account
Book value of Bonds (F+E)
Credit Cash
Debit Interest Expense
Debit Bond Premium
01-01-14
-
-
-
$ 19,254.00
$ 300,000.00
$ 319,254.00
31-12-14
$ 30,000.00
$ 28,732.86
$ (1,267.14)
$ 17,986.86
$ 300,000.00
$ 317,986.86
31-12-15
$ 30,000.00
$ 28,618.82
$ (1,381.18)
$ 16,605.68
$ 300,000.00
$ 316,605.68
31-12-16
$ 30,000.00
$ 28,494.51
$ (1,505.49)
$ 15,100.19
$ 300,000.00
$ 315,100.19
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