Exercise 14-6 Buffalo Company sells 9% bonds having a maturity value of $1,750,0
ID: 2572130 • Letter: E
Question
Exercise 14-6 Buffalo Company sells 9% bonds having a maturity value of $1,750,000 for $1,560,756. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1. Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to 0 decimal places, e.g. 38,548.) Schedule of Discount Amortization Straight-Line Method Cash Paid Interest Expense Discount Amortized Carrying Amount of Bonds Year Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT Y Policy2 2000-2017 John Wiley & Sons, Inc. All Rights Reserved. A Division of John Wiley & Sons. InsExplanation / Answer
Solution:
Par Value of the bonds = $1750,000
Issue Price of the bonds = $1,560,756
Issue price is less than the par value, it means bonds are issued at discount.
Discount on Bonds Payable = $1750,000 – 1560,756 = $189,244
The amount of discount on bonds payable is amortized over the life of the bonds. On each interest payment of the bonds, the discount amortized using straight line method. Under straight line method, each Discount Amortization Amount will remain same.
Annual Amortization of Discount = Total Discount on Bonds Payable / Tenure of Bond
= $189,244 / 5
= $37,849
Annual Interest Expense = Cash Interest Payable + Discount Amortization
Annual Cash Interest Payment = Par Value of the bonds x Stated Interest Rate = $1750,000 * 9% = $157,500
Annual Interest Expense = $157,500 + $37,849 = $195,349
Schedule of Discount Amortization (Straight line method)
Year
Cash Paid
Interest Expense
Discount Amortized
Carrying Amount of Bonds
(a)
(a+b)
(b)
(d)
Jan.1, 2017
$1,560,756
Jan.1, 2018
$157,500
$195,349
$37,849
$1,598,605
Jan.1, 2019
$157,500
$195,349
$37,849
$1,636,454
Jan.1, 2020
$157,500
$195,349
$37,849
$1,674,302
Jan.1, 2021
$157,500
$195,349
$37,849
$1,712,151
Jan.1, 2022
$157,500
$195,349
$37,849
$1,750,000
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Year
Cash Paid
Interest Expense
Discount Amortized
Carrying Amount of Bonds
(a)
(a+b)
(b)
(d)
Jan.1, 2017
$1,560,756
Jan.1, 2018
$157,500
$195,349
$37,849
$1,598,605
Jan.1, 2019
$157,500
$195,349
$37,849
$1,636,454
Jan.1, 2020
$157,500
$195,349
$37,849
$1,674,302
Jan.1, 2021
$157,500
$195,349
$37,849
$1,712,151
Jan.1, 2022
$157,500
$195,349
$37,849
$1,750,000
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