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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise Bond Interest Payments and Interest Expense (Effective Interest)

On January 1, 2019, Hawthorne Corporation issued for SI55,989, 5-year bonds with a face amount of $150,000 and a stated (or coupon) rate of 9%. The bonds pay interest annually and have an effective interest rate of 8%. Assume Hawthorne uses the effective interest rate method.

Required:

  1. Prepare the entry to record the sale of the bonds.
  2. Calculate the amount of the interest payments for the bonds.
  3. Prepare the amortization table through 2020. (Note: Round to the nearest dollar.)
  4. Prepare the journal entry for December 31, 2019, to record the payment of interest and the related interest expense.
  5. Calculate the annual interest expense for 2019 and 2020.

To determine

(a)

Introduction:

As per the effective interest rate method, a constant interest rate on book or carrying value is assigned to each period.

To record:

Journal entry for the issuance of Bonds.

Explanation

Given:

$150,000, stated rate 9% and effective rate 8% were issued at $155,989 for 5 years.

The face value of Bonds issued is recorded as Bonds payable and any premium or discount on issue of Bonds is recorded in separate “Premium on Bonds Payable” or “Discount on Bonds Payable” account whereas in case of issuance of Bonds at par it is a regular journal entry where cash (asset) increased along with Bonds Payable (long term liability)...

To determine

(b)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

The interest payments on bonds.

To determine

(c)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To prepare:

The amortization table.

To determine

(d)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Journal entry to show interest expense and payment of interest for year 2019.

To determine

(e)

Introduction:

A Bond is long term liability wherein the issuer is entitled to pay the face value of the Bond at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

Interest Expense (annual) for year 2019 and 2020.

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