On August 1, 2017, Smith Inc. sold 1000, 6% bonds having a maturity value of $1,
ID: 2580487 • Letter: O
Question
On August 1, 2017, Smith Inc. sold 1000, 6% bonds having a maturity value of $1,000 each. The bonds were sold at 98. Bond issue costs of $60,000 were incurred. The bonds are dated August 1, 2017 and mature on August 1, 2021, with interest payable on August 1 and February 1 of each year. Smith uses the amortized cost method with using the effective interest method to amortize the bond premium or discount. Smith prepares financial statements annually at December 31.
Required – Show ALL calculations
(a)The effective interest rate resulting from this transaction is 8.396%. Prove this using the RATE function in Excel
(b)Prepare the journal entry at the date of issue of the bonds.
(c)Prepare a bond amortization schedule for the bond through to its maturity date of August 1, 2021.
(d)Prepare all other required journal entries relating to the bond for all of 2017 and Feb 1, 2018.
(e)On Feb 2, 2019, the all bonds were repurchased from the Bondholders by Smith at the callable provision of 101 in the bond issuance and retired. Prepare the journal entry to record the repurchase and retirement of these bonds.
Explanation / Answer
1-
Using rate function in excel spreadsheet = rate(nper,pmt,pv,fv,type)
RATE(8,-30,920,-1000,0)
4.198%
nper = 2*4 = 8 pmt =-30 pv = (1000*.98)-60 = 920 fv =1000 type = 0
Annual rate
4.198*2
8.396
2-
cash
920000
discount on bonds payable
20000
bonds issuance expense
60000
bonds payable
1000000
3-
date
cash paid =1000000*3%
interest expense= bond carrying value*4.198%
discount and bond issuance cost amortized = interest expense-cash paid
carrying value in discount on bond payable and bond issue expense = bond discount and bond issue expense carrying value-discount and issue expense amortized
bonds payable
carrying value of bond = carrying value of bonds +discount and issue expenses amortized
1-Aug
80000
1000000
920000
Feb 1 2018
30000
38621.18
8621.18
71378.82
1000000
928621
august 1 2018
30000
38983.52
8983.52
62395.30
1000000
937605
Feb 1 2019
30000
39360.65
9360.65
53034.66
1000000
946965
august 1 2019
30000
39753.61
9753.61
43281.05
1000000
956719
Feb 1 2020
30000
40163.06
10163.06
33117.99
1000000
966882
august 1 2020
30000
40589.71
10589.71
22528.28
1000000
977472
Feb 1 2021
30000
41034.26
11034.26
11494.02
1000000
988506
august 1 2021
30000
41497.48
11494.02
0.00
1000000
1000000
4-
1-Aug
Cash
920000
discount and issue expense on bonds payable
80000
bonds payable
1000000
Dec 31 2017
interest expense
32184.3174
accrued interest expense
25000
discount and issue expense on bonds payable
7184.3174
1-Feb
interest expense
6436.86348
accrued interest expense
25000
Cash
30000
discount and issue expense on bonds payable
1436.86
5-
feb 1 2019
bonds payable
1000000
loss on disposal of bonds payable
63034.66
discount and issue expense on bonds payable
53034.66
cash
1010000
1-
Using rate function in excel spreadsheet = rate(nper,pmt,pv,fv,type)
RATE(8,-30,920,-1000,0)
4.198%
nper = 2*4 = 8 pmt =-30 pv = (1000*.98)-60 = 920 fv =1000 type = 0
Annual rate
4.198*2
8.396
2-
cash
920000
discount on bonds payable
20000
bonds issuance expense
60000
bonds payable
1000000
3-
date
cash paid =1000000*3%
interest expense= bond carrying value*4.198%
discount and bond issuance cost amortized = interest expense-cash paid
carrying value in discount on bond payable and bond issue expense = bond discount and bond issue expense carrying value-discount and issue expense amortized
bonds payable
carrying value of bond = carrying value of bonds +discount and issue expenses amortized
1-Aug
80000
1000000
920000
Feb 1 2018
30000
38621.18
8621.18
71378.82
1000000
928621
august 1 2018
30000
38983.52
8983.52
62395.30
1000000
937605
Feb 1 2019
30000
39360.65
9360.65
53034.66
1000000
946965
august 1 2019
30000
39753.61
9753.61
43281.05
1000000
956719
Feb 1 2020
30000
40163.06
10163.06
33117.99
1000000
966882
august 1 2020
30000
40589.71
10589.71
22528.28
1000000
977472
Feb 1 2021
30000
41034.26
11034.26
11494.02
1000000
988506
august 1 2021
30000
41497.48
11494.02
0.00
1000000
1000000
4-
1-Aug
Cash
920000
discount and issue expense on bonds payable
80000
bonds payable
1000000
Dec 31 2017
interest expense
32184.3174
accrued interest expense
25000
discount and issue expense on bonds payable
7184.3174
1-Feb
interest expense
6436.86348
accrued interest expense
25000
Cash
30000
discount and issue expense on bonds payable
1436.86
5-
feb 1 2019
bonds payable
1000000
loss on disposal of bonds payable
63034.66
discount and issue expense on bonds payable
53034.66
cash
1010000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.