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Bonds
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Straight-line amortization bond
Effective interest rate of amortization bond
Effective interest rate method of amortization is a process of amortizing premium on bond or discount on bond, which allocates the different amount of interest expense in each period of interest payment, but at a constant percentage rate.
To Prepare: The amortization schedule to determine the interest expenses at the effective interest rates.
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To Prepare: The amortization schedule to determine the interest expenses at straight line method.
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To Prepare: The
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To Explain: The pattern of interest differs between the two methods.
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The price value of the bonds as on 30th June 2020 for $10,000 of the bonds.
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INTERMEDIATE ACCOUNTING RMU 9TH EDITION
- Wilbury Corporation issued 1 million of 13.5% bonds for 985,071.68. The bonds are dated and issued October 1, 2019, are due September 30, 2020, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%. Required: 1. Prepare a bond interest expense and discount amortization schedule using the straight-line method. 2. Prepare a bond interest expense and discount amortization schedule using the effective interest method. 3. Prepare adjusting entries for the end of the fiscal year December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. If income before interest and income taxes of 30% in 2020 is 500,000, compute net income under each alternative. 5. Assume the company retired the bonds on June 30, 2020, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight line method of amortization b. effective interest method of amortization 6. Compute the companys times interest earned (pretax operating income divided by interest expense) for 2020 under each alternative.arrow_forwardProblem 14-3 (Algo) Straight-line and effective interest compared [LO14-2] On January 1, 2024, Reyes Recreational Products issued $150,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $145,153 to yield an annual return of 10%. Required: 1. Prepare an amortization schedule that determines interest at the effective interest rate. 2. Prepare an amortization schedule by the straight-line method. 3. Prepare the journal entries to record interest expense on June 30, 2026, by each of the two approaches. 5. Assuming the market rate is still 10%, what price would a second investor pay the first investor on June 30, 2026, for $15,000 of the bonds? Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)arrow_forwardRequired Information Exercise 10-7 (Algo) Straight-Line: Amortization table and bond interest expense LO P2 [The following Information applies to the questions displayed below.] Duval Company Issues four-year bonds with a $118,000 par value on January 1, 2021, at a price of $113,864. The annual contract rate is 6%, and Interest is paid semiannually on June 30 and December 31. Exercise 10-7 (Algo) Part 1 1. Prepare a straight-line amortization table for these bonds. Note: Round your answers to the nearest dollar amount. Semiannual Period-End Unamortized Discount Carrying Value 1/01/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023 6/30/2024 12/31/2024arrow_forward
- Question 25 On June 1, 2020, Mitchell Inc. issued 100, 8%, $1,000 bonds dated June 1, 2020 for $108,530. The bonds pay cash interest semiannually each June 30, and December 31, and were issued to yield 6%. The bonds mature May 31, 2025, and the compar uses the effective interest method to amortize bond discounts or premiums. The partial amortization schedule is as follows: Amortization schedule Cash Effective Premium Outstanding Interest Interest amortization Balance 0 06/01/20 $108.530 1 11/30/20 $4.000 $3.256 ($744) 107,786 2 05/31/21 4,000 3,234 (766) 107,020 Required: Prepare journal entries on the following dates. Round to the nearest dollar. 1. June 1, 2020, bond issuance. 2. November 30, 2020, interest payment. 3. December 31, 2020, adjusting entry. Note: You may create a table as follows to organize your journal entries. Date Account titles Debit Credit 1 Cash 10,000 Sales Revenue 10,000 Edt Format Table 12pt v Paragraoh v B I U 24 6. W R. T F G K L 2N M AV alt ctrtarrow_forwardInstructions X On January 1, 2020, High Shots issued $250,000 of 11% ten-year bonds at 104. Issuance costs amounted to $3,000. Bond premium is amortized on straight-line basis. On July 1, 2026, 40% of the bonds were called at 104. Required: Record the retirement of the bonds. Ignore interest and use straight-line amortization.arrow_forward! Required information Problem 10-4A (Static) Straight-Line: Amortization of bond discount LO P2 [The following information applies to the questions displayed below.] Legacy issues $325,000 of 5%, four-year bonds dated January 1, 2021, that pay interest semiannually on June 30 and December 31. They are issued at $292,181 when the market rate is 8%. Problem 10-4A (Static) Part 3 3. Prepare a straight-line amortization table for the bonds' first two years. Note: Round your intermediate and final answers to the nearest whole dollar. Semiannual Period-End 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 Unamortized Discount $ Carrying Value 32,819 $ 292,181arrow_forward
- PROBLEM 1 On December 31, 2018, Edmand Inc. issued $750,000of 11% five-year bonds for $722,400, yielding an effective interest rate of 12%. Semi annual interest is payable on June 30 and December 31 each year. The firm uses effective interest method to amortize the discount. a) Prepare Amortization schedule showing the necessary information for the first two interest periods. Round amounts to the nearest dollar. b) Prepare the journal entry for the bond issuance on December 31, 2018. c) Prepare the journal entry to record bond interest expense and discount amortization at June 30 2019. d) Prepare the journal entry to record the bond interest expense and discount amortization at December 31, 2019arrow_forwardExercise 10-7 (Static) Straight-Line: Amortization table and bond interest expense LO P2 Skip to question [The following information applies to the questions displayed below.] Duval Company issues four-year bonds with a $100,000 par value on January 1, 2021, at a price of $95,952. The annual contract rate is 7%, and interest is paid semiannually on June 30 and December 31. Exercise 10-7 (Static) Part 3 3. Prepare the journal entry for maturity of the bonds on December 31, 2024 (assume semiannual interest is already recorded).arrow_forwardq6 Sun Corp. markets a 10-year bond issue dated January 1, 2018. The bonds pay interest semiannually on January 1 and July 1. If these bonds are sold on August 1, 2018, how many months accrued interest must be paid by the purchaser and over how many months would any discount on the bonds be amortized?A. Accrued interest- 7 month; Amortization period- 120 monthsB. Accrued interest- 7 month; Amortization period- 113 monthsC. Accrued interest- 1 month; Amortization period- 120 monthsD. Accrued interest- 1 month; Amortization period- 113 monthsarrow_forward
- 26. Bonds Issued at a Premium (Effective Interest) Charger Battery issued $100,000 of 11%, seven-year bonds on December 31, 2022, for $104,868. Interest is paid annually on December 31. The market rate of interest is 10%. Required: Prepare the amortization table using the effective interest rate method. For those boxes in which no entry is required, leave the box blank. If the amount is zero, enter "0". If required, round your answers to the nearest whole dollar.arrow_forwardExercise 10.9 (Algo) Accounting for Bonds Issued at a Premium: Issuance, Interest Payments, and Retirement (LO10-5, LO10-6) Xonic Corporation issued $8.5 million of 20-year, 8 percent bonds on April 1, 2021, at 102. Interest is paid on March 31 and September 30 of each year, and all of the bonds in the issue mature on March 31, 2041 Xonic's fiscal year ends on December 31. Prepare the following journal entries. a. April 1, 2021, to record the issuance of the bonds. b. September 30, 2021, to pay interest and to amortize the bond premium. c. March 31, 2041, to pay interest, amortize the bond premium, and retire the bonds at maturity (make two separate entries). Assume an adjusting entry was made on December 31, 2040, to recognize interest from October 1 to December 31. d. What is the effect of amortizing the bond premium on (1) annual net income and (2) annual net cash flow from operating activities. (ignore possible income tax effects.) (If no entry is required for a transaction/event,…arrow_forward1 Saved Help Save & Ex On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Cash Effective Increase in Outstanding Payment Payment Interest Balance Balance 6,544,432 6,555,654 6,567,437 6,579,809 6,592,799 6,606,439 6,620,761 1 316, 0ее 316,000 316,000 316,000 316, е0е 316,000 327,222 327,783 328,372 328,990 329,640 330,322 11,222 11,783 12,372 12,990 13,640 14,322 3. 4 6 38 316,000 316,000 316,000 384,243 387,655 391,243 68,243 71,655 75,243 7,753,102 7,824,757 7,900,000 39 40 Required: 1. What is the face amount of the bonds? 2. What is the initial selling price of the bonds? 3. What is the term to maturity in years? 4. Interest is determined by what approach? 5. What is the stated annual interest rate? 6. What is the effective annual interest rate? 7. What is the total cash interest paid over the term to maturity? 8. What is the total effective…arrow_forward
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