EBK INTERMEDIATE ACCOUNTING: REPORTING
2nd Edition
ISBN: 9781305727557
Author: PAGACH
Publisher: YUZU
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Question
Chapter 14, Problem 5P
1.
To determine
Prepare a bond interest expense and premium amortization schedule using the
1.
Expert Solution
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 a bond interest expense and premium amortization schedule using the straight line method.
| CORPORATION B | ||||
| PREMIUM AMORIZATION SCHEDULE - STRAIGHT LINE INTEREST METHOD | ||||
| Date | Cash (A = $800,000 × 6%) | Unamortized Premium ( C = $51,705.70 ÷ 8) | Interest expense (B= A–C) | Book |
| 4/10/2016 | $851,705.70 | |||
| 9/30/2016 | $48,000 | $6,463.21 | $41,536.79 | $845,242.49 |
| 3/3/2017 | $48,000 | $6,463.21 | $41,536.79 | $838,779.28 |
| 9/30/2017 | $48,000 | $6,463.21 | $41,536.79 | $832,316.06 |
| 3/3/2018 | $48,000 | $6,463.21 | $41,536.79 | $825,852.85 |
| 9/30/2018 | $48,000 | $6,463.21 | $41,536.79 | $819,389.64 |
| 3/3/2019 | $48,000 | $6,463.21 | $41,536.79 | $812,926.43 |
| 9/30/2019 | $48,000 | $6,463.21 | $41,536.79 | $806,463.21 |
| 3/3/2020 | $48,000 | $6,463.21 | $41,536.79 | $800,000.00 |
Table (1)
2.
To determine
Prepare a bond interest expense and premium amortization schedule using the effective interest method.
2.
Expert Solution
Explanation of Solution
Prepare a bond interest expense and premium amortization schedule using the effective interest method.
| CORPORATION B | ||||
| PREMIUM AMORIZATION SCHEDULE - EFFECTIVE INTEREST METHOD | ||||
| Date | Cash (A = $800,000 × 6%) | Interest expense (B= Prior period D × 5%) | Unamortized Premium ( C = $51,705.70 ÷ 8) | Book value of bonds (D = Prior period D –C) |
| 4/10/2016 | $851,705.70 | |||
| 9/30/2016 | $48,000 | $42,585.29 | $5,414.72 | $846,290.99 |
| 3/3/2017 | $48,000 | $42,314.55 | $5,685.45 | $840,605.53 |
| 9/30/2017 | $48,000 | $42,030.28 | $5,969.72 | $834,635.81 |
| 3/3/2018 | $48,000 | $41,731.79 | $6,268.21 | $828,367.60 |
| 9/30/2018 | $48,000 | $41,418.38 | $6,581.62 | $821,785.98 |
| 3/3/2019 | $48,000 | $41,089.30 | $6,910.70 | $814,875.28 |
| 9/30/2019 | $48,000 | $40,743.76 | $7,256.24 | $807,619.05 |
| 3/3/2020 | $48,000 | $40,380.95 | $7,619.05 | $800,000.00 |
Table (2)
3.
To determine
Prepare
3.
Expert Solution
Explanation of Solution
(a)
Prepare adjusting entry to record accrued interest using straight line method.
| Date | Account titles and Explanation | Debit | Credit |
| December 31, 2016 | Interest expense | $20,768.39 | |
| Premium on bonds payable | $3,231.61 | ||
| Interest payable | $24,000.00 | ||
| (To record adjustment entry for accrued interest) |
Table (3)
- Interest expense is a component of
stockholders’ equity , and it is decreased. Therefore, debit interest expense account for $20,768.39. - Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $3,231.61.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $24,000.
(b)
Prepare adjusting entry to record accrued interest using effective interest method.
| Date | Account titles and Explanation | Debit | Credit |
| December 31, 2016 | Interest expense | $21,157.28 | |
| Premium on bonds payable | $2,842.72 | ||
| Interest payable | $24,000.00 | ||
| (To record adjustment entry for accrued interest) |
Table (4)
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $21,157.28.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $2,842.72.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $24,000.
4.
To determine
Prepare
4.
Expert Solution
Explanation of Solution
a.
Prepare journal entry to record adjusting entry for accrued interest and retirement of bonds as on 30th June 2017.
| Date | Account titles and Explanation | Debit | Credit |
| June 30, 2017 | Interest expense | $20,768.39 | |
| Premium on bonds payable | $3,231.61 | ||
| Interest payable | $24,000.00 | ||
| (To record adjustment entry for accrued interest) | |||
| June 30, 2017 | Bonds payable | $800,000 | |
| Interest payable | $24,000 | ||
| Premium on bonds payable | $35,547.67 | ||
| Gain on bonds redemption | $11,547.67 | ||
| Cash | $848,000 | ||
| (To record retirement of bonds) |
Table (5)
Adjusting entry as on 30th June:
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $20,768.39.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $3,231.61.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $24,000.
Retirement of bonds as on 30th June:
- Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $800,000.
- Interest payable is a current liability, and it is decreased. Therefore, debit interest payable account for $24,000.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $35,547.67.
- Gain on redemption of bonds is a component of stockholders’ equity, and it is increased. Therefore, credit gain on redemption of bonds account for $11,547.67.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $848,000.
b.
Prepare journal entry to record adjusting entry for accrued interest and retirement of bonds as on 30th June 2017.
| Date | Account titles and Explanation | Debit | Credit |
| June 30, 2017 | Interest expense | $21,015.14 | |
| Premium on bonds payable | $2,984.86 | ||
| Interest payable | $24,000.00 | ||
| (To record adjustment entry for accrued interest) | |||
| June 30, 2017 | Bonds payable | $800,000 | |
| Interest payable | $24,000 | ||
| Premium on bonds payable | $37,620.68 | ||
| Gain on bonds redemption (balancing figure) | $13,620.68 | ||
| Cash | $848,000 | ||
| (To record retirement of bonds) |
Table (6)
Adjusting entry as on 30th June:
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $21,015.14.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $2,84.86.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $24,000.
Retirement of bonds as on 30th June:
- Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $800,000.
- Interest payable is a current liability, and it is decreased. Therefore, debit interest payable account for $24,000.
- Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $37,620.68.
- Gain on redemption of bonds is a component of stockholders’ equity, and it is increased. Therefore, credit gain on redemption of bonds account for $13,620.68.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $848,000.
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Chapter 14 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
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