Bats Corporation issued $800,000 of 12% face
Required:
- 1. Prepare a bond interest expense and premium amortization schedule using the straight-line method.
- 2. Prepare a bond interest expense and premium amortization schedule using the effective interest method.
- 3. Prepare any
adjusting entries for the end of the fiscal year, December 31, 2019, using the:- a. straight-line method of amortization
- b. effective interest method of amortization
- 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:- a. straight-line method of amortization
- b. effective interest method of amortization
1.
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)
2.
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)
3.
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 ($41,536.792) | $20,768.39 | |
Premium on bonds payable ($6,463.212) | $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 ($42,314.552) | $21,157.28 | |
Premium on bonds payable ($5,685.452) | $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.
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 30th June 2020.
Date | Account titles and Explanation | Debit | Credit |
June 30, 2020 | Interest expense ($41,536.792) | $20,768.39 | |
Premium on bonds payable ($6,463.212) | $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 ($38,779.28−$3,231.61) | $35,547.67 | ||
Gain on bonds redemption | $11,547.67 | ||
Cash ([$800,000× 1.03] + $24,000) | $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 2020.
Date | Account titles and Explanation | Debit | Credit |
June 30, 2020 | Interest expense ($42,314.552) | $21,015.14 | |
Premium on bonds payable ($6,463.212) | $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 ($40,605.54−$2,984.86) | $37,620.68 | ||
Gain on bonds redemption (balancing figure) | $13,620.68 | ||
Cash ([$800,000× 1.03] + $24,000) | $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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