Chapter 14, Problem 5P

Bats Corporation issued $800,000 of 12% face value bonds for $851,705.70. The bonds were dated and issued on April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. Bats sold the bonds to yield 10%.

Required:

1. 1. Prepare a bond interest expense and premium amortization schedule using the straight-line method.
2. 2. Prepare a bond interest expense and premium amortization schedule using the effective interest method.
3. 3. Prepare any adjusting entries for the end of the fiscal year, December 31, 2019, using the:
   1. a. straight-line method of amortization
   2. b. effective interest method of amortization
4. 4. Assume the company retires the bonds on June 30, 2020, at 103 plus accrued interest. Prepare the journal entries to record the bond retirement using the:
   1. a. straight-line method of amortization
   2. b. effective interest method of amortization

To determine

Prepare a bond interest expense and premium amortization schedule using the straight line 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 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 value of bonds (D = Prior period D –C)
4/10/2019				$851,705.70
9/30/2019	$48,000	$6,463.21	$41,536.79	$845,242.49
3/3/2020	$48,000	$6,463.21	$41,536.79	$838,779.28
9/30/2020	$48,000	$6,463.21	$41,536.79	$832,316.06
3/3/2021	$48,000	$6,463.21	$41,536.79	$825,852.85
9/30/2021	$48,000	$6,463.21	$41,536.79	$819,389.64
3/3/2022	$48,000	$6,463.21	$41,536.79	$812,926.43
9/30/2022	$48,000	$6,463.21	$41,536.79	$806,463.21
3/3/2023	$48,000	$6,463.21	$41,536.79	$800,000.00

Table (1)

To determine

Prepare a bond interest expense and premium amortization schedule using the effective interest method.

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)
4/10/2019				$851,705.70
9/30/2019	$48,000	$42,585.29	$5,414.72	$846,290.99
3/3/2020	$48,000	$42,314.55	$5,685.45	$840,605.53
9/30/2020	$48,000	$42,030.28	$5,969.72	$834,635.81
3/3/2021	$48,000	$41,731.79	$6,268.21	$828,367.60
9/30/2021	$48,000	$41,418.38	$6,581.62	$821,785.98
3/3/2022	$48,000	$41,089.30	$6,910.70	$814,875.28
9/30/2022	$48,000	$40,743.76	$7,256.24	$807,619.05
3/3/2023	$48,000	$40,380.95	$7,619.05	$800,000.00

Table (2)

To determine

Prepare adjusting entries to record accrued interest using (a) straight line method and (b) effective interest method.

Explanation of Solution

(a)

Prepare adjusting entry to record accrued interest using straight line method.

Date	Account titles and Explanation	Debit	Credit
December 31, 2019	Interest expense $\left(\frac{\$41,536.79}{2}\right)$	$20,768.39
	Premium on bonds payable $\left(\frac{\$6,463.21}{2}\right)$	$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, 2019	Interest expense $\left(\frac{\$42,314.55}{2}\right)$	$21,157.28
	Premium on bonds payable $\left(\frac{\$5,685.45}{2}\right)$	$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.

To determine

Prepare journal entry to record retirement of bonds (a) straight line method of amortization and (b) effective interest method of amortization.

Explanation of Solution

a.

Prepare journal entry to record adjusting entry for accrued interest and retirement of bonds as on 30^th June 2020.

Date	Account titles and Explanation	Debit	Credit
June 30, 2020	Interest expense $\left(\frac{\$41,536.79}{2}\right)$	$20,768.39
	Premium on bonds payable $\left(\frac{\$6,463.21}{2}\right)$	$3,231.61
	Interest payable		$24,000.00
	(To record adjustment entry for accrued interest)
June 30, 2020	Bonds payable	$800,000
	Interest payable	$24,000
	Premium on bonds payable $\left(\$38,779.28-\$3,231.61\right)$	$35,547.67
	Gain on bonds redemption		$11,547.67
	Cash $\left(\left[\$800,000\times 1.03\right]+\$24,000\right)$		$848,000
	(To record retirement of bonds)

Table (5)

Adjusting entry as on 30^th 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 30^th 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 30^th June 2020.

Date	Account titles and Explanation	Debit	Credit
June 30, 2020	Interest expense $\left(\frac{\$42,314.55}{2}\right)$	$21,015.14
	Premium on bonds payable $\left(\frac{\$6,463.21}{2}\right)$	$2,984.86
	Interest payable		$24,000.00
	(To record adjustment entry for accrued interest)
June 30, 2020	Bonds payable	$800,000
	Interest payable	$24,000
	Premium on bonds payable $\left(\$40,605.54-\$2,984.86\right)$	$37,620.68
	Gain on bonds redemption (balancing figure)		$13,620.68
	Cash $\left(\left[\$800,000\times 1.03\right]+\$24,000\right)$		$848,000
	(To record retirement of bonds)

Table (6)

Adjusting entry as on 30^th 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 30^th 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.