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Chapter 14: Q5E (page 755)

Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%

Instructions

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2017.

(c) The accrual of interest and the related amortization on December 31, 2017.

Short Answer

Expert verified

(a) The bonds are issued at$612,000.

(b) The business entity amortized a $102 premium on bonds payable.

(c) The business entity amortized a $107premium on bonds payable.

Step by step solution

01

Definition of Bonds Payable

Bond payable can be defined as the securities that are issued by the business to creditors for generating cash. It is reported as the non-current liability of the business entity.

02

Issuance of the bonds

Date

Accounts and explanation

Debit $

Credit $

1 Jan 2017

Cash($600,000脳$102$100)

$612,000

Premium on bond payable

$12,000

Bonds payable

$600,000

(To record the issue of bonds on premium)

03

Payment of interest and related amortization

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Interest expenses

$29,898

Premium on bond payable

$102

Cash

$30,000

(To record the payment of interest and amortization of premium)

Working note:

Calculation of premium amortized:

Particular

Amount $

Interest @ 9.7705% on the book value of bond payable($612,000脳9.7705%脳12)

$29,898

Interest @ 10% on bond payablerole="math" localid="1658993146314" ($600,000脳10%脳12)

($30,000)

Amortization of premium

$102

04

Accrual of interest

Date

Accounts and Explanation

Debit $

Credit $

12 Dec 2017

Interest expenses

$29,893

Premium on bond payable

$107

Interest payable

$30,000

(To record the accrual of interest)

Particular

Amount $

Interest @ 9.7705% on the book value of bond payable(($612,000鈭�$102)脳9.7705%脳12)

$29,893

Interest @ 10% on bond payable ($600,000脳10%脳12)

($30,000)

Amortization of premium

$107

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Most popular questions from this chapter

(Term Modification with Gain鈥擠ebtor鈥檚 Entries) Use the same information as in E14-22 above except that American Bank reduced the principal to \(1,900,000 rather than \)2,400,000. On January 1, 2021, Barkley pays $1,900,000 in cash to American Bank for the principal. Instructions

(a) Can Barkley Company record a gain under this term modification? If yes, compute the gain for Barkley Company.

(b) Prepare the journal entries to record the gain on Barkley鈥檚 books.

(c) What interest rate should Barkley use to compute its interest expense in future periods? Will your answer be the same as in E14-22 above? Why or why not?

(d) Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.

(e) Prepare the interest payment entries for Barkley Company on December 31, of 2018, 2019, and 2020.

(f) What entry should Barkley make on January 1, 2021?

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

(Amortization Schedule鈥擡ffective-Interest) Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)

(Entries for Zero-Interest-Bearing Note) On December 31, 2017, Faital Company acquired a computer from Plato Corporation by issuing a \(600,000 zero-interest-bearing note, payable in full on December 31, 2021. Faital Company鈥檚 credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a \)70,000 salvage value.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entry for purchase on December 31, 2017.

(b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2018.

(c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2019.

Question: What is the 鈥渃all鈥� feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?
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