On January 1, 2014, Oaken Furniture Co. issued $700,000 of 10% bonds and receive

Question

On January 1, 2014, Oaken Furniture Co. issued $700,000 of 10% bonds and received cash totaling $795,141. Interest is payable semiannually on January 1 and July 1. The maturity date on these bonds is January 1, 2024. The firm uses the effective –interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 8%. Oaken Furniture Co. is a calendar-year corporation.

1) Prepare an amortization table through the first two periods (7/1/14 & 1/1/15) using the effective interest method.

2) Prepare the journal entries to record bond related transacations as of the following dates:

a) January 1, 2014

b) July 1, 2014

c) December 31,2014

Explanation / Answer

1) Amortization table - effective interest method A B C D E F G Date Interest Payment Interest Expense Amortization of Credit balance Credit balance BV of stated Mkt @ 4% Bond Prem in Bond premium in Bond Payable Bond 5% * facevalue * prev BV C-B account F + E 01-Jan-14 95141 700000 795141 01-Jul-14 35000 31805.64 -3194.36 91946.64 700000 791946.64 01-Jan-15 35000 31677.87 -3322.13 88624.51 700000 788624.51 2) 01-Jan-14 Cash Dr 795141           Bonds Payable Cr 700000           Bonds Premium Cr 95141 ( To record issuance of bond at a premium) 01-Jul-14 Interest Expense Dr 31805.64 Bonds Premium Dr 3194.36           Cash Cr 35000.00 ( To record interest expense for July 1) 31-Dec-14 Interest Expense Dr 31677.87 Bonds Premium Dr 3322.13          Interest Payable Cr 35000.00 ( To record interest expense for December 31)

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