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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

Question: Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.

Pierre Company has a 12% note payable with a carrying value of \(20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is \)22,600. Prepare the entry to record the fair value option for this note, assuming

(a) no change in credit risk, and

(b) the change is due to a change in credit risk.

Distinguish between the following interest rates for bonds payable:

(a)Yield rate

(b) Nominal Rate

(c) Stated rate

(d) Market rate

(e) Effective rate

BE14-1 (L01) Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semi-annually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information

regarding its equity investments.

December 31, 2017

Investments Cost Fair Value Unrealized Gain (Loss)

Clemson Corp. stock \(20,000 \)19,000 \((1,000)

Colorado Co. stock 10,000 9,000 (1,000)

Buffaloes Co. stock 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 (1,400)

Previous fair value adjustment balance –0–

Fair value adjustment—Cr. \)(1,400)

During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.

stock—\)19,100; Buffaloes Co. stock—$20,500. None of the equity investments result in significant influence.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.
See all solutions

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