1.
Prepare bond interest expense and discount amortization schedule showing interest expense for each interest period using the effective interest method.
1.
Explanation of Solution
Amortization Schedule:
A schedule that gives the detail about each loan payment and shows the allocation of principal and interest over the life of the note, or bond is called amortization schedule.
Prepare bond interest expense and discount amortization schedule showing interest expense for each interest period using the effective interest method.
COMPANY B | ||||
DISCOUNT AMORTIZATION SCHEDULE - EFFECTIVE INTEREST METHOD | ||||
Date | Cash (A = $50,000 × 11%) | Interest expense (B = Prior period D × 12%) | Unamortized discount ( C = B –A) | Book |
9/1/2015 | $48,197.61 | |||
8/31/2016 | $5,500 | $5,783.71 | $283.71 | $48,481.32 |
8/31/2017 | $5,500 | $5,817.76 | $317.76 | $48,799.08 |
8/31/2018 | $5,500 | $5,855.89 | $355.89 | $49,154.97 |
8/31/2019 | $5,500 | $5,898.60 | $398.60 | $49,553.57 |
8/31/2021 | $5,500 | $5,946.43 | $446.43 | $50,000.00 |
Table (1)
2.
Prepare
2.
Explanation of Solution
(a)
Prepare journal entry to record issuance of bonds and the interest payments for 2017 and 2018 using effective interest method.
Date | Account titles and Explanation | Debit | Credit |
September 1, 2015 | Cash | $48,197.61 | |
Discount on bonds payable | $1,802.39 | ||
Bonds payable | $50,000.00 | ||
(To record issuance of bonds) | |||
December 31, 2015 | Interest expense | $1,927.90 | |
Discount on bonds payable | $94.57 | ||
Interest payable | $1,833.33 | ||
(To record payment of interest expense) | |||
August 31, 2016 | Interest expense | $3,855.81 | |
Interest payable | $1,833.33 | ||
Discount on bonds payable | $189.14 | ||
Cash | $5,500 | ||
(To record | |||
December 31, 2016 | Interest expense | $1,939.25 | |
Discount on bonds payable | $105.92 | ||
Interest payable | $1,833.33 | ||
(To record payment of interest expense) | |||
August 31, 2017 | Interest expense | $3,878.51 | |
Interest payable | $1,833.33 | ||
Discount on bonds payable | $211.84 | ||
Cash | $5,500 | ||
(To record adjusting entry for accrued interest) | |||
December 31, 2017 | Interest expense | $1,951.96 | |
Discount on bonds payable | $118.63 | ||
Interest payable | $1,833.33 | ||
(To record payment of interest expense) |
Table (2)
(b)
Prepare journal entry to record issuance of bonds and the interest payments for 2017 and 2018 using straight line interest method.
Date | Account titles and Explanation | Debit | Credit |
September 1, 2015 | Cash | $48,197.61 | |
Discount on bonds payable | $1,802.39 | ||
Bonds payable | $50,000.00 | ||
(To record issuance of bonds) | |||
December 31, 2015 | Interest expense | $1,953.49 | |
Discount on bonds payable | $120.16 | ||
Interest payable | $1,833.33 | ||
(To record payment of interest expense) | |||
August 31, 2016 | Interest expense | $3,906.99 | |
Interest payable | $1,833.33 | ||
Discount on bonds payable | $240.32 | ||
Cash | $5,500 | ||
(To record adjusting entry for accrued interest) | |||
December 31, 2017 | Interest expense | $1,953.49 | |
Discount on bonds payable | $120.16 | ||
Interest payable | $1,833.33 | ||
(To record payment of interest expense) | |||
August 31, 2017 | Interest expense | $3,906.99 | |
Interest payable | $1,833.33 | ||
Discount on bonds payable | $240.32 | ||
Cash | $5,500 | ||
(To record adjusting entry for accrued interest) |
Table (3)
Working note:
Prepare bond interest expense and discount amortization schedule showing interest expense for each interest period using the straight line interest method.
COMPANY B | ||||
DISCOUNT AMORTIZATION SCHEDULE - STRAIGHT LINE INTEREST METHOD | ||||
Date | Cash (A = $50,000 × 11%) | Interest expense ( B = A + C) | Unamortized discount ( C = $1,802.39 ÷ 5) | Book value of bonds ( Prior period D + C) |
9/1/2016 | $48,197.61 | |||
8/31/2017 | $5,500 | $5,860.48 | $360.48 | $48,558.09 |
8/31/2018 | $5,500 | $5,860.48 | $360.48 | $48,918.57 |
8/31/2020 | $5,500 | $5,860.48 | $360.48 | $49,279.04 |
8/31/2021 | $5,500 | $5,860.48 | $360.48 | $49,639.52 |
8/31/2022 | $5,500 | $5,860.48 | $360.48 | $50,000.00 |
Table (4)
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