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Chapter 13: Q5E (page 658)

EXCEL (Effective-Interest versus Straight-Line Bond Amortization) On January 1, 2017, Phantom Company

acquires \(200,000 of Spiderman Products, Inc., 9% bonds at a price of \)185,589. Interest is received on January 1 of each year, and

the bonds mature on January 1, 2020. The investment will provide Phantom Company a 12% yield. The bonds are classified as

held-to-maturity.

Instructions

(a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method.

(b) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method.

c) Prepare the journal entry for the interest revenue and discount amortization under the straight-line method at

December 31, 2018.

(d) Prepare the journal entry for the interest revenue and discount amortization under the effective-interest method at

December 31, 2018.

Short Answer

Expert verified

Interest revenue according to the straight-line method is $22,804.

Interest revenue according to the effective-interest method is $22,271

Step by step solution

01

Bond amortization according to the straight-line method

Schedule of Interest Revenue and Bond Discount Amortization Straight-line Method

9% Bond Purchased to Yield 12%

Date

Cash Received

Interest Revenue

Discount Amortization

Carrying Amount

January 1, 2018

$185,589

December 31, 2018

$18,000

$22,804

$4,804

$190,393

December 31, 2019

$18,000

$22,804

$4,804

$195,197

December 31, 2020

$18,000

$22,804

$4,804

$200,000

02

Bond amortization according to the effective interest method

Schedule of Interest Revenue and Bond Discount Amortization Effective Interest Method

9% Bond Purchased to Yield 12%

Date

Cash Received

Interest Revenue

Discount Amortization

Carrying Amount

January 1, 2018

$185,589

December 31, 2018

$18,000

$22,271

$4,271

$189,860

December 31, 2019

$18,000

$22,783

$4,783

$194,643

December 31, 2020

$18,000

$23,357

$5,357

$200,000

03

Interest Revenue entry according to the straight-line method

Date

Description

Debit

Credit

December 31, 2018

Cash

$18,000

Discount Amortization

$4,804

Interest Revenue

$22,804

Being entry of the interest revenue

04

Interest revenue entry according to effective interest method

Date

Description

Debit

Credit

December 31, 2018

Cash

$18,000

Discount Amortization

$4,271

Interest Revenue

$22,271

Being entry of the interest revenue

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Most popular questions from this chapter

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

E13-10 (L03) (Warranties) Soundgarden Company sold 200 color laser copiers on July 10, 2017, for \(4,000 apiece, together with a 1-year warranty. Maintenance on each copier during the warranty period is estimated to be \)330.

Instructions

Prepare entries to record the sale of the copiers, the related warranty costs, and any accrual on December 31, 2017. Actual warranty costs (inventory) incurred in 2017 were $17,000.

Question: The presentation of current and non-current liabilities in the statement of financial position (balance sheet):

  1. is shown only on GAAP financial statements.
  2. is shown on both a GAAP and an IFRS statement of financial position.
  3. is always shown with current liabilities reported first in an IFRS statement of financial position.

(d)includes contingent liabilities under IFRS.

BE13-6 (L01) Lexington Corporation’s weekly payroll of \(24,000 included FICA taxes withheld of \)1,836, federal taxes with-held of \(2,990, state taxes withheld of \)920, and insurance premiums withheld of $250. Prepare the journal entry to record Lexington’s payroll.

How does the acid-test ratio differ from the current ratio? How are they similar?
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