Question

Exercise 14-09 (Part Level Submission)

On June 30, 2020, Seashore Company issued $4,180,000 face value of 13%, 20-year bonds at $4,494,460, a yield of 12%. Seashore uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Collapse question part (a) Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(1) The issuance of the bonds on June 30, 2020.

(2) The payment of interest and the amortization of the premium on December 31, 2020.

(3) The payment of interest and the amortization of the premium on June 30, 2021.

(4) The payment of interest and the amortization of the premium on December 31, 2021.

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

(c) Provide the answers to the following questions. What amount of interest expense is reported for 2021? Will the Interest Expense reported in 2021 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? Determine the total cost of borrowing over the life of the bond. Will the total Interest Expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

Answer 1

Interest Payment [($4180000 x 13%)/2] $2,71,700 The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/(premium) which will be amortised. Amortisation schedule (Effective Interest Method) Date Opening Closing Book Cash Payment Interest Expense Amortisation of Bond Premium book Balance Value Computation (C) Computation (D)= (C)-(B) (A)+(C)-(B) ($4180000x13%/2] (A) x 12%/2 30-Jun-20 $44,94,460 31-Dec-20 $44,94,460 $2,71,700 [$4494460 x(12%/2)] $2,69,668 ($271700-$269668] $2,032 $44,92,428 30-Jun-21 $44,92,428 $2,71,700 ($4492428 x(12%/2)] $2,69,546 ($271700-$269546] $2,154 $44,90,274 31-Dec-21 $44,90,274 $2,71,700 ($4490274 x(12%/2)] $2,69,416 ($271700-$269416] $2,284 $44,87,990 (B)- (A) Credit Debit $44,94,460 Ans a-1 $3,14,460 $41,80,000 Ansa-2 $2,69,668 $2,032 $2,71,700 Date Particulars 30-Jun-20 Cash Premium on Bond Payable Bond Payable (To Record issuance of Bond) 31-Dec-20 Interest Expense Premium on Bond Payable Cash To Record interest payment and amortisation) 30-Jun-21 Interest Expense Premium on Bond Payable Cash (To Record interest payment and amortisation) 31-Dec-21 Interest Expense Premium on Bond Payable Cash (To Record interest payment and amortisation) Ans a-3 $2,69,546 $2,154 $2,71,700 Ans a-4 $2,69,416 $2,284 $2,71,700

Ansb Seashore Company Balance Sheet (Partial) December 31, 2021 Assets Bonds Payable Add: Premium on Bond Payable Total $41,80,000 $3,07,990 $44,87,990 Ans c 1 Interest Expense for 2021 is ($269546+$269416] $5,38,962 Ans c 2 In straight line amortization, the premium received or discount given on issue of bond is amortized over the bond period maturity on straight line basis. Formula is (Discount / Premium Amount) divided by bond period. Straight Line Amortisation ($314460/40] $7,862 Interest Expense for 2021 [($271700+$7862)X2] $5,59,124 Interest Expense reported under staright line method will be greater. Ans C3 Total cost borrowing: Interest payment ($271700x40] Add: Maturit Value Total Less: Amount borrowed Totla cost of borrowing $1,08,68,000 $41,80,000 $1,50,48,000 ($44,94,460) $1,05,53,540 Ans c 4 Total Interest Expense for the life of the bond be the same as than the total interest expense if the straight-line method of amortization were used.