Delly & Company issues $1,250,000 of 8.5%, three-year bonds dated January 1, 201
ID: 2485414 • Letter: D
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
1.
Account titles
Debit
Credit
Cash
$ 1,299,995.00
Bonds payable
$ 1,250,000.00
Premium in issue of bonds
$ 49,995.00
2.
Semi-annual interest payments = $1,250,000 * 8.5% * ½ = $53,125
No. of coupon payments = 3 years * 2 = 6
Total interest payments = $53,125 * 6 = $318,750
Interest expense = Interest payment - Amortization of premium on issue of bonds = $318,750 - $49,995 = $268,755
3.
Bond Amortization Schedule
Number of payments
Date of Payment
Payment Amount
Bond Interest Expense
Premium Amortisation
Unamortized Premium
Carrying Value of Bond
($1,250,000 * 8.5%* 1/2)
(Carrying amount * 7% * 1/2)
(Interest payment - Interest expense)
0
01-01-2014
$ 49,995.00
$ 1,299,995.00
1
30-06-2014
$ 53,125.00
$ 45,499.83
$ 7,625.18
$ 42,369.83
$ 1,292,369.83
2
31-12-2014
$ 53,125.00
$ 45,232.94
$ 7,892.06
$ 34,477.77
$ 1,284,477.77
3
30-06-2015
$ 53,125.00
$ 44,956.72
$ 8,168.28
$ 26,309.49
$ 1,276,309.49
4
31-12-2015
$ 53,125.00
$ 44,670.83
$ 8,454.17
$ 17,855.32
$ 1,267,855.32
5
30-06-2016
$ 53,125.00
$ 44,374.94
$ 8,750.06
$ 9,105.26
$ 1,259,105.26
6
31-12-2016
$ 53,125.00
$ 44,019.74
$ 9,105.26
$ 0.00
$ 1,250,000.00
Totals
$ 318,750.00
$ 268,755.00
$ 49,995.00
4.
Bond Amortization Schedule
Number of payments
Date of Payment
Payment Amount
Premium Amortisation
Bond Interest Expense
Unamortized Premium
Carrying Value of Bond
($1,250,000 * 8.5%* 1/2)
($49,995/6)
(Payment - Premium Amortisation)
0
01-01-2014
$ 49,995.00
$ 1,299,995.00
1
30-06-2014
$ 53,125.00
$ 8,332.50
$ 44,792.50
$ 41,662.50
$ 1,291,662.50
2
31-12-2014
$ 53,125.00
$ 8,332.50
$ 44,792.50
$ 33,330.00
$ 1,283,330.00
3
30-06-2015
$ 53,125.00
$ 8,332.50
$ 44,792.50
$ 24,997.50
$ 1,274,997.50
4
31-12-2015
$ 53,125.00
$ 8,332.50
$ 44,792.50
$ 16,665.00
$ 1,266,665.00
5
30-06-2016
$ 53,125.00
$ 8,332.50
$ 44,792.50
$ 8,332.50
$ 1,258,332.50
6
31-12-2016
$ 53,125.00
$ 8,332.50
$ 44,792.50
$ 0.00
$ 1,250,000.00
Totals
$ 318,750.00
$ 49,995.00
$ 268,755.00
5.
Date
Account titles
Debit
Credit
June 30, 2014
Interest expense
$ 45,499.82
Premium in issue of bonds
$ 7,625.18
Cash
$ 53,125.00
December 31,2014
Interest expense
$ 45,232.94
Premium in issue of bonds
$ 7,892.06
Cash
$ 53,125.00
Account titles
Debit
Credit
Cash
$ 1,299,995.00
Bonds payable
$ 1,250,000.00
Premium in issue of bonds
$ 49,995.00
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