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Chapter 14: Q3BE (page 753)

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

Short Answer

Expert verified

The total for both debit and credit sides is $331,200.

Step by step solution

01

Meaning of Straight Line Amortization

When the discount on the bond is amortized over the maturity period in a fixed annual amount, dividing the discount amount by the maturity period is known as straight-line amortization. The maturity period becomes twice oforiginal maturity period if interest is payable semi-annually.

02

Journal Entries

Journal Entries

Date

Accounts and Explanation

Debit

Credit $

January 1, 2017

Cash

$294,000

Discount on Bonds Payable

$6,000

Bonds Payable

$300,000

July 1, 2017

Interest expenses

$15,600

Cash

$15,000

Discount on Bonds Payable

$600

December 31, 2017

Interest expenses

$15,600

Interest Payable

$15,000

Discount on Bonds Payable

$600

Working:

Cash on January 1, 2017 = ($300,000 x 98%) = $294,000

Interest expenses paid cash on July 1, 2017 = ($300,000 x 10% x 6/12) = $15,000

Discount on bonds payable on July 1, 2017 (amortize semi-annually) = ($6,000 x 1/10) = $600

Discount on bonds payable on December 31, 2017 = ($6,000 x 1/10) = $600

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Most popular questions from this chapter

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.

What is done to record properly a transaction involving the issuance of a non-interest -bearing long-term note in exchange for property?

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)

Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 11% and has a carrying value of \(16,000. At year-end, Shonen Knife’s borrowing rate (credit risk) has declined; the fair value of the note payable is now \)17,500. (a) Determine the unrealized holding gain or loss on the note. (b) Prepare the entry to record any unrealized holding gain or loss.

(Amortization Schedule—Effective-Interest) Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)
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