Problem 3: Recording Entries for Bonds Following is an amortization table for an

Question

Problem 3: Recording Entries for Bonds

Following is an amortization table for an issue of three-year bonds on January 1, 2014:

Effective Contractual Carrying

Carrying Value at Interest Interest Amortization Value End

Year Beginning of Year Incurred to be Paid of Principal Of Year

2014 $105,154 $8,412 $10,000 $1,588 $103,566

2015 $103,566 $8,285 $10,000 $1,715 $101,851

2016 $101,851 $8,148 $10,000 $1,852 $100,000

Total $24,845 $30,000 $5,155

Required: Place you answer in the shaded boxes below with any computations to the right

A. How much were the bonds sold for?

B. What is the stated (contractual) rate of interest?

C. What is the effective rate of interest?

D. Record the entries necessary over the life of the bonds for the issuance, retirement and yearly interest accrual.

You do not need to record the payment of interest.

Date Account Title Debit Credit

1/1/14 Cash The accounts for the first entry have been entered

Premium on Bonds Payable enter the amounts and record the remaining entries.

Bonds Payable Start each entry opposite the date

12/31/14

12/31/15

12/31/16

12/31/16

Explanation / Answer

Year Book Value of Bond Interest expense Interest Premium on bond payable Face vale of bond Interest expense 2014 $105,154 $8,412 $10,000 $1,588 $103,566 $8,412 2015 $103,566 $8,285 $10,000 $1,715 $101,851 $8,285 2016 $101,851 $8,148 $10,000 $1,852 $100,000 $8,148 $24,845 $30,000 $5,155 $24,845 Face value + interest A. How much were the bonds sold for? $110,000 B. What is the stated (contractual) rate of interest? 103,566*r    = $10,000 $103,566 0.097      =0.097*100      =9.7% C. What is the effective rate of interest? 103,566*r    = $8000 $103,566      =$8412/$103566 0.08      =0.08*100       =8% D. Record the entries necessary over the life of the bonds for the issuance, retirement and yearly interest accrual. 1. Issuance Bonds payable issued at a premium journal entry Debit Credit Cash Bond Payble $100,000 Premium On bond payable $5,155 2.Yearly interest Accrual 2014 Year 2015 year 2016 Debit Credit Debit Credit Debit Credit Cash $10,000 Cash $10,000 Cash $10,000 Interest Expenses $10,000 Interest Expenses $10,000 Interest Expenses $10,000 Interest Expenses $1,588 Interest Expenses $1,715 Interest Expenses $1,852 Premium on Bonds payable $1,588 Premium on Bonds payable $1,715 Premium on Bonds payable $1,852 $11,588 $11,588 $11,715 $11,715 $11,852 $11,852 Retirement From the bond amortization schedule, we can see that at the end of period 3, the ending book value of the bond is reduced to $100,000, and the premium on bonds payable ($5,154) has been amortized to interest expense. The final bond accounting journal would be to repay the par value of the bond with cash. Debit Credit Cash $100,000 Bond Payable $100,000

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