Exercise 14-9 On June 30, 2017, Headland Company issued $4,300,000 face value of

Question

Exercise 14-9 On June 30, 2017, Headland Company issued $4,300,000 face value of 13%, 20-year bonds at $4,623,487, a yield of 12%. Headland uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Prepare the jounal entries to record the following transactions. (Round answer to o decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically Indented when amount is entered. Do not indent manually,) (1) The issuance of the bonds on June 30, 2017 (2) The payment of interest and the artization of the premium on December 31, 2017 (3) The payment of interest and the amortization of the premium on June 30, 2018 (4) The payment of interest and the artization of the premium on December 31, 2018. No. Date Account Titles and Explanation Debit Credit 1 June 30, (2) December 31, (3) 2018 December 31, (4) 2018 Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet. (Round answers to o decimal places, e.g. 38,548.) Headland Company Balance Shee Provide the answers to the following questions. (1) What amount of interest expense is reported for 2018 (Round answer to 0 decimal places, e.g. 38,548.) Interest expense reported for 2018 s (2) will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The bond interest expense reported in 2018 wll be the amount that would be reported if the straight-line method of amortization were used. (3) Determine the total cost of borrowing over the life of the bond. (Round answer to O decimal places, e.a. 38,548.) Total cost of borrowing over the life of the bond (4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense If the straight-line method of amortization were used? the total interest The total bond interest expense for the life of the bond will be expense if the straight-line method of amortization were used.

Explanation / Answer

Headland Company

Balance Sheet ( Partial)

December 31, 2018

1. Amount of interest expense reported for 2018 = $ 554,435.

2. The bond interest expense reported in 2018 will be greater than the amount that would be reported if the straight-line method of amortization was used.

3. Total cost of borrowing over the life of the bonds = Total amount paid out over the life of the bond - Total amount received = ( $ 279,500 x 40 + $ 4,300,000) - 4,623,487 = $ 10,856,513.

4. The total bond interest expense for the life of the bond will be the same as the total interest expense if the straight-line method of amortization were used.

Event Date Account Titles Debit Credit $ $ 1. June 30, 2017 Cash 4,623,487 Bonds Payable 4,300,000 Premium on Bonds Payable 323,487 2. December 31, 2017 Interest Expense 277,409 Premium on Bonds Payable 2,091 Cash 279,500 3. June 30, 2018 Interest Expense 277,284 Premium on Bonds Payable 2,216 Cash 279,500 4. December 31, 2018 Interest Expense 277,151 Premium on Bonds Payable 2,349 Cash 279,500

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