On January 1, 2012 Clive Davis Company sold 12% bonds having a maturity value of
ID: 2491002 • Letter: O
Question
On January 1, 2012 Clive Davis Company sold 12% bonds having a maturity value of $800,000 for $860,652 which provides the bondholders with a 10% effective yield. The bonds are dated January 1, 2012 and mature on January 1, 2017. Interest is payable annually on December 31st of each year. Clive Davis Company allocates interest and unamortized discount or premium using the effective interest method.
Which of the following is the correct Schedule of Interest Expense and Bond Premium Amortization using the effective interest method?
Explanation / Answer
Date Interest Payment (Stated 12% x Face) Interest Expense (Mkt 10% x Previous Book value of Bond) Amortization of Bond Premium Credit Balance in Bond Premium Account Credit Balance in Bonds Payable Acount Book Value of the Bonds Jan 1, 2012 $60652 $800000 $860652 Jan 1, 2013 $96000 $86065 $9935 $50717 $800000 $850717 Jan 1, 2014 $96000 $85072 $10928 $39789 $800000 $839789 Jan 1, 2015 $96000 $83979 $12021 $27768 $800000 $827768 Jan 1, 2016 $96000 $82777 $13223 $14545 $800000 $814545 Jan 1, 2017 $910545 $81455 $14545 $0 $0 $0
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