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Chapter 14: 10E (page 756)

On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of \(500,000 for \)537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

  1. Prepare the journal entry at the date of the bond issuance.
  2. Prepare a schedule of interest expense and bond amortization for 2017–2019.
  3. Prepare the journal entry to record the interest payment and the amortization for 2017.
  4. Prepare the journal entry to record the interest payment and the amortization for 2019.

Short Answer

Expert verified
  1. Premium on bonds payable is $37,907.37
  2. At the end of every year, cash paid is $60,000
  3. Premium on bond payable is $6,209.26
  4. Interest expense is $52,486.79

Step by step solution

01

Meaning of Amortization

Amortization refers to recompensing a debt through normal, pre-arranged installments that incorporate principal and interest. Principal and interest payments are made in each circumstance where the term "amortization" is pertinent.

02

(a) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 1, 2017

Cash

537,907.37

Premium on bonds payable

37,907.37

Bonds payable

500,000.00

03

(b) Preparing a schedule of interest expense and bond amortization

Schedule of Interest expense and Bond Premium Amortization

Effective-Interest method

12% Bonds Sold to Yields 10%

Date

Cash Paid

Interest Expense

Premium

Amortized

Carrying

Amounts of

Bonds

1/1/17

-

-

-

$537,907.37

12/31/17

$60,000.00

$53,790.74

$6,209.26

531,698.11

12/31/18

60,000.00

53,169.81

6,830.19

524,867.92

12/31/19

60,000.00

52,486.79

7,513.21

517,354.71

Working note:

Calculation of Cash paid

CashPaid=Maturityvalue×Bondrate=$500,000×12%=$60,000

04

(c) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2017

Interest expense

53,790.74

Premium on bond payable

6,209.26

Cash

60,000.00

05

(d) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2019

Interest expense

52,486.79

Premium on bond payable

7,513.21

Cash

60,000.00

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Most popular questions from this chapter

Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.

(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.

(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.

E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.

(d) Amounts withheld from employees’ wages for income taxes.

(e) Notes payable due January 15, 2020.

(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of \)2,000,000 maturing June 30, 2018.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

Presented below are two independent situations.

(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of \(350,000 at the time of purchase. A \)550,000, zero-interest-bearing note due January 1, 2020, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

Question: Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
See all solutions

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