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Chapter 14: Q4ISTQ (page 718)

On January 1, Patterson Inc. issued \(5,000,000, 9% bonds for \)4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of:

(a) \(4,725,500. (c) \)258,050.

(b) \(4,714,500. (d) \)4,745,000

Short Answer

Expert verified

The correct option is(b) $4,714,500.

Step by step solution

01

Definition of Discount Amortization

The process under which the business entity assigns the discount to interest payment made each year is known as discount amortization. Under this method, the unamortized discount reduces, and the carrying value of the bonds increases after each period.

02

Explanation for the correct option

The business entity will report a bond payable of $4,714,500 on 31 December.

Working note: Amortization schedule

Date

Cash interest at the stated rate on bond payable (9%)

Interest expenses at market rate on carrying value (10%)

Discount amortized

Unamortized Discount

Bond payable

Carrying value

1 Jan

$305,000

$5,000,000

$4,695,000

31 Dec

$450,000

$469,500

$19,500

$285,500

$5,000,000

$4,714,500

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Most popular questions from this chapter

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company鈥檚 credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

  1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
  2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months鈥� interest and the amortization of premium on the bonds.

Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor).

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  1. Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on American鈥檚 books.
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The following article appeared in the Wall Street Journal.

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Instructions

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Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?

Using the same information as in E14-22, answer the following questions related to American Bank (creditor).

Instructions

  1. What interest rate should American Bank use to calculate the loss on the debt restructuring?
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  3. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  4. Prepare the interest receipt entry for American Bank on December 31, 2019.
  5. What entry should American Bank make on January 1, 2021?
See all solutions

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