Exercise 14-9 On June 30, 2017, Sheffield Company issued $3,000,000 face value o

Question

Exercise 14-9 On June 30, 2017, Sheffield Company issued $3,000,000 face value of 13%, 20-year bonds at $3,225,689, a yield of 12%. Sheffield uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Prepare the journal entries to record the following transactions. (Round answer to 0 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 amortization 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 amortization of the premium on December 31, 2018. Date Account Titles and Explanation Debit Credit (1) June 30, 2017 (2) December 31, 2017

Explanation / Answer

Procceds from issue of Bonds 3225689 Face value of bonds 3000000 Premium on Issue 225689 Interest paid in cash Semi annually =$3000,000*13%*1/2=$195000 Date Interest paid in cash Interest @ market rate Amortisation of Premium Unamortised premium Bonds payable amount June 30-2017 225689 3225689 dec17-2017 195000 193541 1459 224230 3224230 $3225689*12%*1/2 (195000-193541) (225689-1459) (3225689-1459) June 30-2018 195000 193454 1546 222684 3222684 $3224230*0.12*1/2 (195000-193454) (224230-1546) (3224230-1546) dec17-2018 195000 193361 1639 221045 3221045 ($3222684*0.12*1/2) (195000-193361) (222684-1639) (3222684-1639) Journal Entries No date Accounts debit Credit 1 Jun-30 cash A/c 3225689       To Bond payable A/c 3000000        To premium on Bonds issued A/c 225689 (being issue of bonds has been recorded) 2 dec31-2017 Interest expenses A/c 193541 premium on issue of bonds A/c 1459             To cash A/c 195000 (Being interest paid on Bonds payable has been reocrded) 3 June 30 2018 Interest expenses A/c 193454 premium on issue of bonds A/c 1546             To cash A/c 195000 (Being interest paid on Bonds payable has been reocrded) 4 dec31-2018 Interest expenses A/c 193361 premium on issue of bonds A/c 1639             To cash A/c 195000 (Being interest paid on Bonds payable has been reocrded) ii) Balance sheet as on 31 december ,2018 Sheffield Company Balance sheet on December 31,2018 Amount in $ Long term Liabilities Bond payable 3000000 premium on issue of bonds 221045 3221045 iii) Answer the following questions 1) What is the amount of interest expense reported for 2018 Interst expense on june 30,2018 =$193454 Interest expenses on dec,31,2018=$193361 total interest expense for 2018 =$193454+$193361=$386815 2) the Bond interest expense reported in 2018 will be Lower than the Interest expense would be reported if the straightline method of depreciation is used to amortise the Premium 3) Total cost of Borrowing Over the life of the Bond =Interest paid on bonds - preimum on issue of Bonds =$195000*(2*20)   -$225689 =$7574,311

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