Chapter 9, Problem 17E

1.

To determine

Prepare amortization schedule of WW.

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 amortization schedule.

Amortization schedule
Date	Cash Paid	Interest expense	Decreasing in Carrying Value	Carrying Value
	(A = $600,000 × 3.5%)	(B = D × 3%)	( C = A– B)	( D = D – C)
1//1/2021				$644,632
6/30/2021	$21,000	$19,339	$1,661	$642,971
12/31/2021	$21,000	$19,289	$1,711	$641,260
6/30/2022	$21,000	$19,238	$1,762	$639,498
12/31/2022	$21,000	$19,185	$1,815	$637,683
6/30/2023	$21,000	$19,130	$1,870	$635,813
12/31/2023	$21,000	$19,074	$1,926	$633,887

Table (1)

Working note:

Calculate semiannual stated interest rate.

$\begin{array}{c}\text{Semiannual stated interest rate = }\frac{\text{Annual stated interest rate}}{2}\\ =\frac{7\%}{2}\\ =3.5\%\end{array}$

Calculate semiannual market interest rate.

$\begin{array}{c}\text{Semiannual market interest rate = }\frac{\text{Annual market interest rate}}{2}\\ =\frac{6\%}{2}\\ =3\%\end{array}$

2.

To determine

Prepare journal entry to record retirement of bonds as on 31^st December 2026.

Explanation of Solution

Prepare journal entry to record retirement of bonds as on 31^st December 2026.

Date	Account titles and Explanation	Debit	Credit
January 31, 2026	Bonds payable	$600,000
	Premium on bonds payable (1)	$33,887
	Gain on retirement on bonds (2)		$65,576
	Cash (3)		$568,311
	(To record retirement of bonds before the maturity period)

Table (2)

Working notes:

Calculate Premium on bonds payable.

$\begin{array}{c}\text{Premium on bonds payable =}\text{Carrying value of the bonds }-\text{Face value of the bonds}\\ \text{=}\text{\$633,887}-\$600,000\\ =\$33,887\end{array}$ (1)

Calculate gain on retirement of bonds.

$\begin{array}{c}\text{Gain on retirement of bonds =}\text{Bonds payable + Premium on bonds payable }-\text{Cash}\\ \text{=}\text{\$600,000 +}\text{\$33,887}-\$568,311\\ =\$65,576\end{array}$ (2)

Calculate the issue price of the bonds.

$\begin{array}{c}\text{Price of bonds}\}=\left\{\begin{array}{l}\text{Present value of principal}+\\ \text{Present value of interest payments}\end{array}\right\}\\ =\$346,485\left(4\right)+\$221,826\left(5\right)\\ =\$568,311\end{array}$ (3)

Calculate the present value of face value of principal

Particulars	Amount ($)
Face value of bonds (a)	$600,000
PV factor at an annual market rate of 3.5% for 36 periods (b)	$\times$ 0.57748
Present value of face value of principal $\left(\text{a}\right)\text{×}\left(\text{b}\right)$	$346.485

Note: The present value of $1 for 14 periods at 4% is 0.57748 (refer Table 2 in Appendix). (4)

Calculate present value of interest payments.

Particulars	Amount ($)
Interest payments amount (a) (6)	$21,000
PV factor at an annual market rate of 3% for 40 periods (b)	$\times$10.56312
Present value of interest payments $\left(\text{a}\right)\text{×}\left(\text{b}\right)$	$221,826

Note: The Present value of an ordinary annuity of $1 for 14 periods at 4% is 10.56312 (refer Table 4 in Appendix). (5)

Calculate the amount of interest payment.

$\begin{array}{c}\text{Interest payment}=\text{Face value of bonds}\times \text{ interest rate}\times \text{Time period}\\ =\$600,000\times \frac{7}{100}\times \frac{6}{12}\\ =\$21,000\end{array}$ (6)

• Bonds payable is a long term liabilities, and it is decreased. Therefore, debit bonds payable account for $600,000.
• Premium on bonds payable is an adjunct liability, and it is decreased. Therefore, debit premium on bonds payable account for $33,887.
• Gain on retirement of bonds is a component of stockholders’ equity, and it is increased. Therefore, credit gain on retirement of bonds account for $65,576.
• Cash is a current asset, and it is decreased. Therefore, credit cash account for $568,311.