Cornerstone Exercise Bonds Issued at a Discount (Effective Interest)
Refer to the information for Sicily Corporation above.
Required:
Prepare the journal entries for December 31, 2020 and 2021.
Use the following information for Cornerstone Exercises 9-33 and 9-34:
Crafty Corporation issued 5475,000 of 5%, 7-year bonds on January 1, 2020, for $448,484. Interest is paid annually on December 31. The market rate of interest is 6%.
Concept introduction:
Bonds:
Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date.
Amortization of Bonds premium or discount:
Bonds may be issued at a premium or discount. The premium or discount on issue of binds is amortized or the life of bonds using the straight line or effective rate methods.
To prepare:
The journal entries for Dec. 31, 2020 and 2021.
The Amortization table for Bonds using the effective interest method is explained as follows:
Sicily Corporation | ||||||
Amortization Table | ||||||
Using the effective interest rate method | ||||||
Semiannual Interest Period-End | Cash Interest Paid | Bond Interest Expense | Discount Amortized | Unamortized Discount | Carrying Value | |
A=300000*5%/2 | B =Prior E *7%/2 | C =B-A | D =Prior D -C | E = 300000-D | ||
0 | Jan. 1, 2020 | $ - | $ - | $ 42,637 | $ 257,363 | |
1 | Dec. 31, 2020 | $ 7,500 | $ 9,008 | $ 1,508 | $ 41,129 | $ 258,871 |
2 | Dec. 31, 2021 | $ 7,500 | $ 9,060 | $ 1,560 | $ 39,569 | $ 260,431 |
The journal entries for Dec...
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