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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

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?

Strickland Company owes \(200,000 plus \)18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland鈥檚 business deteriorated due to a faltering regional economy. On December 31, 2017, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of \(390,000, accumulated depreciation of \)221,000, and a fair value of \(180,000.

Instructions

  1. Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
  2. How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2017 income statement?
  3. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock (\)10 par) which has a fair value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland鈥檚 stock as a trading investment, prepare the entries to record the transaction for both parties.

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

BE14-1 (L01) Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semi-annually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 11% and has a carrying value of \(16,000. At year-end, Shonen Knife鈥檚 borrowing rate (credit risk) has declined; the fair value of the note payable is now \)17,500. (a) Determine the unrealized holding gain or loss on the note. (b) Prepare the entry to record any unrealized holding gain or loss.
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