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.

(I have every question done, except questions 6 and 7, can someone please help with those!)

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

6 The journal entry for bonds retirement on 1st January 2015 at $106 The8.5% bonds of $1,250,000 on 1st January 2014 are issued at $1,299,955. Premium recorded on the date of issuance= ($1,299,955-$1,250,000)=$49,955 Now the redemption of bonds are made at $106 that is ($1,250,000×106%)=$1,325,000 1325000 Profit on redemption of bonds=($132,500,000-$1,250,000)-$49,955=$25,045 The journal entry for redemption of bonds Bonds payable $ 1,250,000 Premium on bonds $        49,955 Profit on redemption $        25,045 Cash $ 1,325,000 (Being profit on redemption of bonds recorded) 7 The change in market value of the bond does not reflects in the financial statement i.e income statement or balance sheet. The change in market rate means change in market value. If market rate increases the value of bond decreases and if market rate decreases the market vlaue of bond increases. The increase of decrease in market value does not reflects in financial statement. Market value is calculated for premium amortization and recording interest expense.

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