Sub Part-1
Bonds Issuance:
The Bonds issuance by the company is a source of long term financing and is issued at a discount or premium depending the prevailing market rate of interest and stated rate of interest on bonds. When the stated rate of interest is higher than the market rate of interest, then the investors will be ready to invest only in the situation when the bonds are issued at premium. This premium on bonds issue shall be treated as income by deducting the amortized portion from the cash interest paid to arrive at the interest expense of the period.
The
Sub Part-2
Straight line Amortization of Premium:
The Straight line amortization of Premium is a technique of writing off the total discount over a period of bonds with an equal amount on each interest period. This equal amount can be computed by dividing the total amount of discount by the number of interest periods over a life of bonds.
The cash interest, straight line amortized premium and Interest expense for each interest period to be computed.
Sub-Part 3
Total interest expense over the life of bonds:
The total interest expense over the life off bonds can be computed by the adding up the all the amount paid over the lifetime of the bonds i.e. cash interest payment and maturity
The Total interest expenses over the life of bonds.
Sub Part-4
Amortization table:
The amortization table under
The Preparation of amortization schedule.
Sub Part-5
Accounting treatment of interest payment and amortized discount:
The Accounting entry required to be passed at each interest period is debiting the total interest expense as per amortization chart and also, Premium on bonds payable is debited for the amount of premium amortized and credit being made to the cash account for cash interest paid.
The Journal entries of interest expenses for two interest periods.
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Chapter 14 Solutions
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