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Chapter 14: Q11P (page 762)

(Effective-Interest Method) Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help.

On June 30, 2017, Hobart Company issued \(2,000,000 face value of 11%, 20-year bonds at \)2,171,600, a yield of 10%. Hobart Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.

Short Answer

Expert verified

The balance of the unamortized schedule on 30 June 2019 is$165,479.

Step by step solution

01

Definition of Bond Amortization

Bond amortization refers to a method used by the business entity to spread the discount or the premium on the bonds payable over its life. Generally, two bond amortization methods are straight-line and effective interest methods.

02

Amortization Schedule

Date

Interest payment at the stated rate on face value (5.5%)

Interest expenses at the market rate on the previous year book value (5%)

Amortized premium

Unamortized premium

Bond payable

Book value of bond payable

30 June 2017

$171,600

$2,000,000

$2,171,600

31 Dec 2017

$110,000

$108,580

$1,420

$170,180

$2,000,000

$2,170,180

30 June 2018

$110,000

$108,509

$1,491

$168,689

$2,000,000

$2,168,689

31 Dec 2018

$110,000

$108,434

$1,566

$167,123

$2,000,000

$2,167,123

30 June 2019

$110,000

$108,356

$1,644

$165,479

$2,000,000

$2,165,479

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Most popular questions from this chapter

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

Question: What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?

Samson Corporation issued a 4-year, \(75,000, zero-interest-bearing note to Brown Company on January 1, 2017, and received cash of \)47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.
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