Delly & Company issues $1,250,000 of 8.5%, three-year bonds dated January 1, 201

Question

Delly & Company issues $1,250,000 of 8.5%, three-year bonds dated January 1, 2014, that pays interest semi-annually. Interest is paid on June 30 and December 31. They are issued at $1,299,955 and the market rate is 7% on the date of issue.

Required:

1. Prepare the January 1, 2014, journal entry to record the bonds' issuance.

2. Determine the total bond interest expense to be recognized over the bonds' life.

3. Prepare an effective interest amortization table for the bonds.

4. Prepare a straight-line interest amortization table for the bonds.

5. Prepare the journal entries to record the first two interest payments assuming the effective interest method is used.

6. Prepare the journal entry to record the bonds' retirement on January 1, 2015, at 106.

7. Assume that the market rate on January 1, 2014, is 14% instead of 11%. Without presenting numbers, describe how this change affects the amounts reported on Baides’ financial statements.

Explanation / Answer

Working notes:

(a) Bond premium = $(1,299,995 - 1,250,000) = $49,995

(b) Semi-annual coupon rate = 8.5% / 2 = 4.25%

(c) Semi-annual coupon = $1,250,000 x 4.25% = $53,125

(d) Semi-Annual market rate = 7% / 2 = 3.5%

(1) Jan 1, 2014

DR Cash $1,299,995

         Bonds payable       $1,250,000

         Premium on bonds $49,995

(To record bond issued at premium)

(2) Amortization table as follows.

So, total interest expense = $268,804

(3) Amortization table: As above

Note: First 3 questions are answered.

Date Interest payment @4.25% x Face Value Interest expense @3.5% of Book Value Amortization of Premium Balance in Bond Premium Bond Payable Book Value of Bond (A) (B) (C) = (B) - (A) (D) (E) (F) = (D) + (E) Jan 1, 2014 49,995 12,50,000 12,99,995 June 30,2014 53,125 45,500 -7,625 42,370 12,50,000 12,92,370 Dec 31, 2014 53,125 45,233 -7,892 34,478 12,50,000 12,84,478 June 30, 2015 53,125 44,957 -8,168 26,309 12,50,000 12,76,309 Dec 31, 2015 53,125 44,671 -8,454 17,855 12,50,000 12,67,855 June 30, 2016 53,125 44,375 -8,750 9,105 12,50,000 12,59,105 Dec 31, 2016 53,125 44,069 -9,056 49 12,50,000 12,50,049 TOTAL 3,18,750 2,68,804 -49,946

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