Question

WILL RATE FAST:

E14.9B (LO 1) (Entries and Questions for Bond Transactions) On July 1, 2020, Sugarland Company issued $2,000,000 face value of 10%, 10-year bonds at $1,770,602, a yield of 12%. Sugarland uses the effective-interest method to amortize bond pre- mium or discount. The bonds pay semiannual interest on June 30 and December 31. Instructione

Answer 1

(b). Balance sheet presentation for the liability for bonds payable on the December 31, 2021, balance sheet.

Bonds Payable	$2,000,000
Discount on Bond Payable	($209,545)
Net Bonds Payable	$1,790,455

(c).

(1). Interest expense is reported for 2021 is $213,617.

Calculation : $106,610 interest paid 06/30 + $107,007 interest paid 12/31 = $213,617

(2). Interest expense is less than that reported by Straight Line Method.

Because the straight line method utilized the same amortization for each period the bond is outstanding. The effective interest method multiplies the carrying value by the effective rate and then subtracts the interest expense from the interest payment to determine the amortization.

(3). The total cost of borrowing over the life of the bond is $2,229,398

Amortization Schedule
Loan	Interest Payment (Face Value x Discount Rate)	Interest Expense (Book Value x Market Rate)	Amortization of Discount/Premium (Interest Payment - Interest Expense)	Discount Balance	Face Value of Bond	Book Value of Bond
	-			$229,398	$2,000,000	$1,770,602
1	$100,000	$106,236	$6,236	$223,162	$2,000,000	$1,776,838
2	$100,000	$106,610	$6,610	$216,552	$2,000,000	$1,783,448
3	$100,000	$107,007	$7,007	$209,545	$2,000,000	$1,790,455
4	$100,000	$107,427	$7,427	$202,118	$2,000,000	$1,797,882
5	$100,000	$107,873	$7,873	$194,245	$2,000,000	$1,805,755
6	$100,000	$108,345	$8,345	$185,900	$2,000,000	$1,814,100
7	$100,000	$108,846	$8,846	$177,054	$2,000,000	$1,822,946
8	$100,000	$109,377	$9,377	$167,677	$2,000,000	$1,832,323
9	$100,000	$109,939	$9,939	$157,737	$2,000,000	$1,842,263
10	$100,000	$110,536	$10,536	$147,202	$2,000,000	$1,852,798
11	$100,000	$111,168	$11,168	$136,034	$2,000,000	$1,863,966
12	$100,000	$111,838	$11,838	$124,196	$2,000,000	$1,875,804
13	$100,000	$112,548	$12,548	$111,647	$2,000,000	$1,888,353
14	$100,000	$113,301	$13,301	$98,346	$2,000,000	$1,901,654
15	$100,000	$114,099	$14,099	$84,247	$2,000,000	$1,915,753
16	$100,000	$114,945	$14,945	$69,302	$2,000,000	$1,930,698
17	$100,000	$115,842	$15,842	$53,460	$2,000,000	$1,946,540
18	$100,000	$116,792	$16,792	$36,668	$2,000,000	$1,963,332
19	$100,000	$117,800	$17,800	$18,868	$2,000,000	$1,981,132
20	$100,000	$118,868	$18,868	($0)	$2,000,000	$2,000,000
Total	$2,000,000	$2,229,398	$229,398

Calculation : $2,000,000 cash payment to investor + $229,398 discount paid at maturity = $2,229,398

(4).The bond interest expense will be the same under both methods.

Because the cash payment and the discount amortization will be the same in total.