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Chapter 12: Q17SE_2 (page 658)

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 6%, Benson Realty issues

\(700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson

Realty received \)713,234 in cash at issuance.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Short Answer

Expert verified

The cash account is debited with $713,234, and the payable bond account is credited with $713,234.

Step by step solution

01

Definition of journal entry

The journal entry is the record maintain on daily basis to show the financial transactions or events of the company.

02

Journal entries and the payment of interest  

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$713,234

6% Bonds Payable

$713,234

(Being issue entry of the bonds)

June 30, 2019

Interest Expense

$21,398

Premium on Bonds

$477

Cash

$21,875

(Being entry for the payment of interest)

December 31, 2019

Interest Expense

$21,411

Discount on Bonds

$464

Cash

$21,875

(Being entry for the payment of interest)

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Most popular questions from this chapter

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Accounting for a long-term note payable

On January 1, 2018, Lakeman-Fay signed a \(1,500,000, 15-year, 7% note. The loan

required Lakeman-Fay to make annual payments on December 31 of \)100,000

principal plus interest.

Requirements

1. Journalize the issuance of the note on January 1, 2018.

2. Journalize the first note payment on December 31, 2018.

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

Describing bonds, journalizing transactions for bonds payable using the straight-line amortization method, and journalizing transactions for a mortgage payable

This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. Canyon Canoe Company plans to raise the capital by issuing \(210,000 of 7.5%, six-year bonds on January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives \)208,476 when the bonds are issued.

The company also issues a mortgage payable for \(450,000 on January 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of \)45,000 plus interest for ten years, payable on December 31. The mortgage interest rate is 8%.

Requirements

1. Will the bonds issue at face value, a premium, or a discount?

2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations.

a. Cash received from the bond issue.

b. Cash received from the mortgage payable.

c. Semiannual bond interest payments for 2020. Amortize the premium or discount using the straight-line amortization method.

d. Payment on the mortgage payable for 2020.

3. Calculate the total interest expense incurred in 2020.

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodBrad Nelson, Inc. issued \(600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, and the bonds pay interestsemiannually.

Learning Objectives 2, 3, 4

3. June 30, 2018, InterestExpense \)25,200

Learning Objectives 2, 3, 4

June 30, 2018, Interest Expense$37,750

C H A P T E R 1 2

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.
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