Chapter 14, Problem 11E

1.

To determine

Prepare bond interest expense and discount amortization schedule showing interest expense for each interest period using the effective interest method.

Explanation of Solution

Amortization Schedule:

A schedule that gives the detail about each loan payment and shows the allocation of principal and interest over the life of the note, or bond is called amortization schedule.

Prepare bond interest expense and discount amortization schedule showing interest expense for each interest period using the effective interest method.

COMPANY B
DISCOUNT AMORTIZATION SCHEDULE - EFFECTIVE INTEREST METHOD
Date	Cash (A = $50,000 × 11%)	Interest expense (B = Prior period D × 12%)	Unamortized discount ( C = B –A)	Book value of bonds ( Prior period D + C)
9/1/2015				$48,197.61
8/31/2016	$5,500	$5,783.71	$283.71	$48,481.32
8/31/2017	$5,500	$5,817.76	$317.76	$48,799.08
8/31/2018	$5,500	$5,855.89	$355.89	$49,154.97
8/31/2019	$5,500	$5,898.60	$398.60	$49,553.57
8/31/2021	$5,500	$5,946.43	$446.43	$50,000.00

Table (1)

2.

To determine

Prepare journal entry to record issuance of bonds and the interest payments for 2017 and 2018 using (a) effective interest method and (b) straight line method.

Explanation of Solution

(a)

Prepare journal entry to record issuance of bonds and the interest payments for 2017 and 2018 using effective interest method.

Date	Account titles and Explanation	Debit	Credit
September 1, 2015	Cash	$48,197.61
	Discount on bonds payable	$1,802.39
	Bonds payable		$50,000.00
	(To record issuance of bonds)
December 31, 2015	Interest expense $\left(\$5,783.71\times \frac{4}{12}\right)$	$1,927.90
	Discount on bonds payable $\left(\$283.71\times \frac{4}{12}\right)$		$94.57
	Interest payable		$1,833.33
	(To record payment of interest expense)
August 31, 2016	Interest expense $\left(\$5,783.71\times \frac{8}{12}\right)$	$3,855.81
	Interest payable	$1,833.33
	Discount on bonds payable $\left(\$283.71\times \frac{8}{12}\right)$		$189.14
	Cash		$5,500
	(To record adjusting entry for accrued interest)
December 31, 2016	Interest expense $\left(\$5,817.76\times \frac{4}{12}\right)$	$1,939.25
	Discount on bonds payable $\left(\$317.76\times \frac{4}{12}\right)$		$105.92
	Interest payable		$1,833.33
	(To record payment of interest expense)
August 31, 2017	Interest expense $\left(\$5,817.76\times \frac{8}{12}\right)$	$3,878.51
	Interest payable	$1,833.33
	Discount on bonds payable $\left(\$317.76\times \frac{8}{12}\right)$		$211.84
	Cash		$5,500
	(To record adjusting entry for accrued interest)
December 31, 2017	Interest expense $\left(\$5,855.89\times \frac{4}{12}\right)$	$1,951.96
	Discount on bonds payable $\left(\$355.86\times \frac{4}{12}\right)$		$118.63
	Interest payable		$1,833.33
	(To record payment of interest expense)

Table (2)

(b)

Prepare journal entry to record issuance of bonds and the interest payments for 2017 and 2018 using straight line interest method.

Date	Account titles and Explanation	Debit	Credit
September 1, 2015	Cash	$48,197.61
	Discount on bonds payable	$1,802.39
	Bonds payable		$50,000.00
	(To record issuance of bonds)
December 31, 2015	Interest expense $\left(\$5,860.48\times \frac{4}{12}\right)$	$1,953.49
	Discount on bonds payable $\left(\$360.48\times \frac{4}{12}\right)$		$120.16
	Interest payable		$1,833.33
	(To record payment of interest expense)
August 31, 2016	Interest expense $\left(\$5,860.48\times \frac{8}{12}\right)$	$3,906.99
	Interest payable	$1,833.33
	Discount on bonds payable $\left(\$360.48\times \frac{8}{12}\right)$		$240.32
	Cash		$5,500
	(To record adjusting entry for accrued interest)
December 31, 2017	Interest expense $\left(\$5,860.48\times \frac{4}{12}\right)$	$1,953.49
	Discount on bonds payable $\left(\$360.48\times \frac{4}{12}\right)$		$120.16
	Interest payable		$1,833.33
	(To record payment of interest expense)
August 31, 2017	Interest expense $\left(\$5,860.48\times \frac{8}{12}\right)$	$3,906.99
	Interest payable	$1,833.33
	Discount on bonds payable $\left(\$360.48\times \frac{8}{12}\right)$		$240.32
	Cash		$5,500
	(To record adjusting entry for accrued interest)

Table (3)

Working note:

Prepare bond interest expense and discount amortization schedule showing interest expense for each interest period using the straight line interest method.

COMPANY B
DISCOUNT AMORTIZATION SCHEDULE - STRAIGHT LINE INTEREST METHOD
Date	Cash (A = $50,000 × 11%)	Interest expense ( B = A + C)	Unamortized discount ( C = $1,802.39 ÷ 5)	Book value of bonds ( Prior period D + C)
9/1/2016				$48,197.61
8/31/2017	$5,500	$5,860.48	$360.48	$48,558.09
8/31/2018	$5,500	$5,860.48	$360.48	$48,918.57
8/31/2020	$5,500	$5,860.48	$360.48	$49,279.04
8/31/2021	$5,500	$5,860.48	$360.48	$49,639.52
8/31/2022	$5,500	$5,860.48	$360.48	$50,000.00

Table (4)