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Chapter 12: Q21RQ (page 655)
In regard to a bond discount or premium, what is the effective-interest amortization
method?
Effective interest amotization is the method used amortize the bond by using the book value and actual interest rate.
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Determining the present value of bonds payable and journalizing using the effective-interest amortization method
Sleep Well, Inc. is authorized to issue 9%, 10-year bonds payable. On January 1, 2018, when the market interest rate is 10%, the company issues $500,000 of the bonds. The bonds pay interest semiannually.
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 second payment of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.
How does compound interest differ from simple interest?
On January 1, 2018, when the market interest rate is 6%, Hawkins Corporation issues \(200,000 of 8%, five-year bonds payable. The bond pay interest semianually. Hawkins Corporation recieved \)217,040 in cash at issuance. Assume interest payment dates are June 30 and December 31. Prepare an effective-intesret amortization method amortization table for the first two semiannual interest periods.
Retiring bonds payable before maturity
On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds payable
at 102. Powell Company has extra cash and wishes to retire the bonds payable on
January 1, 2019, immediately after making the second semiannual interest payment. To
retire the bonds, Powell Company pays the market price of 98.
Requirements
1. What is Powell Company’s carrying amount of the bonds payable on the retirement
date?
2. How much cash must Powell Company pay to retire the bonds payable?
3. Compute Powell Company’s gain or loss on the retirement of the bonds payable.
Retiring bonds payable before maturity
On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds
payable
at 102. Powell Company has extra cash and wishes to retire the bonds payable
on
January 1, 2019, immediately after making the second semiannual interest
payment. To
retire the bonds, Powell Company pays the market price of 98.
Requirements
1. What is Powell Company’s carrying amount of the bonds payable on the
retirement
date?
2. How much cash must Powell Company pay to retire the bonds payable?
3. Compute Powell Company’s gain or loss on the retirement of the bonds
payable.
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