Question

14-05 In the following independent case, the company closes its books on December 31

1. Carla Co. sells $491,000 of 8% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021.

Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)

Prepare all of the relevant journal entries from the time of sale until December 31, 2021. (Assume that no reversing entries were made.) (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places e.g. 58,971. 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.)

Answer 1

1. Semiannual coupon = $ 491,000 x 8 % x 1/2 = $ 19,640

i = 12 % x 1/2 = 6 %.

n = 7

PVA _{6%, n=7} = [ { 1 - ( 1/1.06 )⁷ } / 0.06 ] = 5.5824

PV _{6%, n= 7} = ( 1 / 1.06 ) ⁷ = 0.6651

Present value of the bonds = $ 19,640 x 5.5824 + $ 491,000 x 0.6651 = $ 109,638.34 + $ 326,564.10 = $ 436,202.44

Bond Amortization Table:

Date	Amount Paid	Interest Expense	Discount Amortized	Bond Carrying Value
3/1/20				436,202
9/1/20	19,640	26,172	6,532	442,734
3/1/21	19,640	26,564	6,924	449,658
9/1/21	19,640	26,979	7,339	456,997
3/1/22	19,640	27,420	7,780	464,777
9/1/22	19,640	27,887	8,247	473,024
3/1/23	19,640	28,381	8,741	481,765
9/1/23	19,640	28,875	9,235	491,000

In the books of Carla Co. :

Date	Account Titles	Debit	Credit
		$	$
3/1/20	Cash	436,202
	Discount on Bonds Payable	54,798
	Bonds Payable		491,000
9/1/20	Interest Expense	26,172
	Discount on Bonds Payable		6,532
	Cash		19,640
12/31/21	Interest Expense	17,709
	Discount on Bonds Payable		4,616
	Interest Payable		13,093
3/1/21	Interest Expense	8,855
	Interest Payable	13,093
	Discount on Bonds Payable		2,308
	Cash		19,640
9/1/21	Interest Expense	26,979
	Discount on Bonds Payable		7,339
	Cash		19,640
12/31/21	Interest Expense	18,280
	Discount on Bonds Payable		5,187
	Interest Payable		13,093