Question

On June 30, 2017. Flint Company issued $5.100.000 Face value of 13% 20-year bonds at $5483,670, a yield of and December 31 Fines the effective-interest method to amortize bond premium or discount The bonds paysann feest on line 30 werden 3 4 by r Prepare the journal entries to record the following transactions. Round when amount is entered. Do not inden man ett y for the account indender for the amounts Credit counter automaty Indented (1) The issuance of the bondhoune 302017 2 The payment of interest and the motion of the premium on December 31 2017 (a) The payment of interest and the mo tion of the premium on June 30, 2018 14 The payment of interest and the mortization of the prema on December 31, 2018 Account Tities and Explanation Date (1) June 30, 2017 121 December 31, 2017 13 June 30, 2018

Answer 1

Solution: Journal entries:

Credit Debit $ 5,483,670 No. Date Accounts Title (1) June 30, 2017 Cash Bonds payable Premium on bonds payable $ 5,100,000 $ 383,670 (2) Dec 31, 2017 Interest Expense Premium on bonds payable Cash 329,020 2,480 $ $ 331,500 (3) $ June 30, 2018 Interest Expense Premium on bonds payable Cash 328,871 2,629 $ 331,500 (4) Dec. 31, 2018 Interest Expense Premium on bonds payable Cash $ $ 328,714 2,786 $ 331,500

Workings:

Time Interest Expense(A) Interest pmt.(B) Premium amortization Bonds' Carrying value (6% of previous (6.5% of Face (Issue price - Prem. Carrying value) value) (B-A) Amort.) $5,483,670 $329,020.20 $331,500 $2,479.80 $5,481,190 $328,871.41 $331,500 $2,628.59 $5,478,562 $328,713.70 $331,500 $2,786.30 $5,475,775 0

First Company Balance sheet as on Dec. 31, 2018 Long-term liabilities Bonds payable Premium on bonds payable (unamortized) Book value of bonds payable $ 5,100,000 381,190 5,481,190

(1). Interest exp. reported for 2018 = $328,871 + 328,714 = $657,585

(2). The bond interest exp. in 2018 will be higher the amount that would be reported if straight-line-method of amortization were used. Because under SLM method, amortization of premium is equal all the time, while in the other method (used), amortization of premium is lower & it increases gradually which result higher interest exp. as compare to SLM

(3) Cost of borrowing over the life of bond = Total interest Payment + Principle payment due - Issue price of bonds

   = $5,100,000*13% + 5,100,000 - 5,483,670

   = $279,330