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Chapter 14: Q7BE (page 753)

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.

Short Answer

Expert verified

The total for both the debit and credit sides is $7,000.

Step by step solution

01

Meaning of Effective Interest Method

In the effective interest rate methoddifference between interest expenses on the bond's issue price at the effective interest rate and interest payable at the coupon rate isamortized as a premium or discount.

02

Journal Entries

Adjusting journal entries for interest expenses is recorded on December 31, 2017.

Journal Entries

Date

Accounts and Explanation

Debit

Credit

December 31, 2017

Interest expenses

$6,446.36

Premium on Bonds Payable

$553.64

Interest Payable

$7,000






Working:

Interest expenses on December 31 = ($644,636 x 6% x 2/12) = $6,446.36

Interest payable on December 31, 2017 = ($600,000 x 7% x 2/12) = $7,000

Premium on bond payable on December 31 = ($7,000-$6,446.36) = $553.64

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Most popular questions from this chapter

(Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.

May 1, 2017 Bonds payable with a par value of \(900,000, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)

Jan. 1, 2018 Interest on the bonds is paid.

April 1 Bonds with par value of \)360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Instructions

(Round to two decimal places.)

Prepare journal entries for the transactions above.

Assume the bonds in BE14-2 were issued at 103. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semi-annually.

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

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

  1. Prepare the journal entry on Gottlieb’s books for debt restructure.
  2. Prepare the journal entry on Ceballos’s books for debt restructure

On March 1, 2017, Sealy Company sold its 5-year, $1,000 face value, 9% bonds dated March 1, 2017, at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2017. Sealy uses the effective-interest method of amortization. The bonds can be called by Sealy at 101 at any time on or after March 1, 2018.

Instructions

a. (1) How would the selling price of the bond be determined?

(2) Specify how all items related to the bonds would be presented in a balance sheet prepared immediately after the bond issue was sold.

b. What items related to the bond issue would be included in Sealy’s 2017 income statement, and how would each be determined?

c. Would the amount of bond discount amortization using the effective-interest method of amortization be lower in the second or third year of the life of the bond issue? Why?

d. Assuming that the bonds were called in and redeemed on March 1, 2018, how should Sealy report the redemption of the bonds on the 2018 income statement?
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