Exercise 14-9 On June 30, 2017, Sandhill Company issued $4,300,000 face value of
ID: 2599165 • Letter: E
Question
Exercise 14-9 On June 30, 2017, Sandhill Company issued $4,300,000 face value of 13%, 20-year bonds at $4,623,487, a yield of 12%. Sandhill 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. No. Date Account Titles and Explanation Debit Credit (1) June 30, 2017 (2) December 31, 2017 (3) June 30, 2018 (4) December 31, 2018 Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.) Sandhill Company Balance Sheet $ $ 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 $ (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 will 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 0 decimal places, e.g. 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 bond interest expense for the life of the bond will be the total interest expense if the straight-line method of amortization were used.
Explanation / Answer
Sandhill Company Date Interest Payment(Face Value *6.5%) Interest Expense(Book Value *6%) Amortization of bonds premium(Interest Payment-Interest Expense) ( A )Credit balance in bonds premium account(Bond premium-Amortization of bonds premium) (B )Credit balance in bonds payable account (A)+(B) Book value of bonds 30/06/2017 $ 323,487.00 $ 4,300,000.00 $ 4,623,487.00 31/12/2017 $ 279,500.00 $ 277,409.22 $ 2,090.78 $ 321,396.22 $ 4,300,000.00 $ 4,621,396.22 30/06/2018 $ 279,500.00 $ 277,283.77 $ 2,216.23 $ 319,179.99 $ 4,300,000.00 $ 4,619,179.99 31/12/2018 $ 279,500.00 $ 277,150.80 $ 2,349.20 $ 316,830.79 $ 4,300,000.00 $ 4,616,830.79 1) Date Particular Amount(DR) Amount(CR) 30/06/17 Cash A/c $ 4,623,487.00 To Bonds Payable $ 4,300,000.00 To Premium on Bonds Payable $ 323,487.00 (Being amount of Bonds issued at a premium of $323487) 2) 31/12/17 Interest Expense $ 277,409.22 Premium on Bonds Payable $ 2,090.78 To Cash $ 279,500.00 (Being amount of Interest Paid semi annually) 3) 30/06/18 Interest Expense $ 277,283.77 Premium on Bonds Payable $ 2,216.23 To Cash $ 279,500.00 (Being amount of Interest Paid semi annually) 4) 31/12/18 Interest Expense $ 277,150.80 Premium on Bonds Payable $ 2,349.20 To Cash $ 279,500.00 (Being amount of Interest Paid semi annually) Balance Sheet Long Term Liabilities Bonds Payable $ 4,300,000.00 Premium on Bonds Payable $ 316,830.79 Book Value of Bonds Payable $ 4,616,830.79 Interst Expense reported in 2018 Interest Expense of 30th june 2018 $ 277,283.77 Interest Expense of 31st Dec 2018 $ 277,150.80 Total Interest Expense reported in 2018 $ 554,434.57 Straight Line Amortization (A) (B) (C ) (D) (E ) (f) (g) Period Interest Payment=($4300000*6.5%) Interest Expense Bond Premium Bond Premium account Bonds Payable Account Book Value of the bonds (C )=(B)-(D) 323487/40 Years (g)-(f) Face Value 30-Jun-17 $ 323,487.00 $ 4,300,000.00 $ 4,623,487.00 31-Dec-17 $ 279,500.00 $ 271,412.83 $ 8,087.18 $ 315,399.83 $ 4,631,574.18 30-Jun-18 $ 279,500.00 $ 271,412.83 $ 8,087.18 $ 307,312.65 $ 4,639,661.35 31-Dec-18 $ 279,500.00 $ 271,412.83 $ 8,087.18 $ 299,225.48 $ 4,647,748.53 Interst Expense reported in 2018 Interest Expense of 30th june 2018 $ 271,412.83 Interest Expense of 31st Dec 2018 $ 271,412.83 Total Interest Expense reported in 2018 $ 542,825.65 Interest reported in 2018 under straight line method is less than under under Effective Interest method.
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