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Chapter 14: Q6E (page 755)

(Amortization Schedule鈥擲traight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)

Short Answer

Expert verified

The discount amortized each year totals $28,836.8.

Step by step solution

01

Definition of Bond 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

Schedule of interest expense and discount amortization

Year

Cash interest

Amortization

Interest expenses

Bond payable

Carrying amount

0

$2,000,000

$1,855,816

1

$200,000

$28,836.8

$228,836.8

$2,000,000

$1,884,652.8

2

$200,000

$28,836.8

$228,836.8

$2,000,000

$1,913,489.6

3

$200,000

$28,836.8

$228,836.8

$2,000,000

$1,942,326.4

4

$200,000

$28,836.8

$228,836.8

$2,000,000

$1,97116.2

5

$200,000

$28,836.8

$228,836.8

$2,000,000

$2,000,000

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Most popular questions from this chapter

Describe the two criteria for determining the valuation of financial assets.

Good-Deal Inc. developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal offered a low down payment and low car payments for the first year after purchase. It believes that this promotion will bring in some new buyers.

On January 1, 2017, a customer purchased a new \(33,000 automobile, making a down payment of \)1,000. The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Good-Deal required a $400 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2018. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as of January 1, 2020.

Instructions

(a) Prepare a note amortization schedule for the first year.

(b) Indicate the amount the customer owes on the contract at the end of the first year.

(c) Compute the amount of the new quarterly payments.

(d) Prepare a note amortization schedule for these new payments for the next 2 years.

(e) What do you think of the new sales promotion used by Good-Deal?

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton鈥檚 December 31, 2017, adjusting entry.

When is the stated interest rate of a debt instrument presumed to be fair?

Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?
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