Question

Problem 10-13A On January 1, 2019, Cheyenne Corp. issued $2,920,000 face value, 8%, 10-year bonds at $3,125,089. This price resulted in an effective-interest rate of 7% on the bonds. Cheyenne uses the amortize bond premium or discount. The bonds pay annual interest on each January 1 effective-interest method Prepare the journal entries to record the following transactions. (Round answers to 0 decimal places, e.g. 15,250. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (1) The issuance of the bonds on January 1, 2019. (2) Accrual of interest and amortization of the premium on December 31, 2019 (3) The payment of interest on January 1, 2020 (4) Accrual of interest and amortization of the premium on December 31, 2020. Account Titles and Explanation No. Date Debit Credit (1) (2) Dec. 31, 2019 (3) (4) Dec. 31, 2020
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Answer 1

Solution $2,920,000 $3,125,089 $ 205,089 Face Value of Bonds Issue price of Bonds Premium on issue of Bonds ($3,125,089 - $2,920,000) Stated rate of interest Effective interest rate Bond life Interest payment frequency 8% 7% 10 Years Annually Annual interest payment = $2,920,000 x 8% = $233,600 Bond Premium Amortization Table Effective-Interest Method Bonds sold to Market Yield Date Cash paid Interest expense Premium Amortized Unamortized Premium Carrying amount of Bonds 1/1/2019 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 $ 233,6001 $233,600 $233,600 $233,600 $233,600 $233,600 $233,600 $233,600 $233,600 $233,600 $ 218,756 $217,717 $216,605 $215,416 $214,143 $212,781) $211,323 $209,764 $208,096 $206,310 $14,844) $15,883 $16,995 $18,184 $19,457 $20,819 $22,277 $23,836 $25,504 $27,2901 $ 205,089 $190,245 $174,362 $157,367 $139,183 $119,726 $98,907 $76,630 $52,794 $27,290 $0 $3,125,089 $3,110,245 $3,094,362 $3,077,367 $3,059,183 $3,039,726 $3,018,907 $2,996,630 $2,972,794 $2,947,290 $2,920,000 Required 1.: Journal entry to record the transactions Credit Date Jan. 1, 2019 Debit $3,125,089 Account Titles and Explanation Cash Bonds Payable Premium on Bonds Payable (To record issuance of bonds) $2,920,000 $ 205,089 Dec. 31, 2019 Interest Expense $218,756 Premium on Bonds Payable $14,844 Interest Payable (To record interest accrual and amortization of premium) $233,600 Jan. 1, 2020 $233,600 Interest Payable Cash (To record payment of interest) $233,600 Dec. 31, 2020 Interest Expense $217,717 Premium on Bonds Payable $15,883 Interest Payable (To record interest accrual and amortization of premium) $233,600

Required 2: Balance sheet presentation for the bond payable at December 31, 2020 Cheyenne Corp. Balance Sheet As at December 31, 2020 Bonds Payable $2,920,000 Add: Unamortized premium on Bonds Payable $174,362 $3,094,362 Required 3: Interest expense reported for 2020 $217,717 Required 4: Calculation of Bond interest expense under straight-line amortization method Total interest payment over the life of Bonds ($233,600 x 10) Add: Face value of Bonds to be repaid at the time of maturity Total payment during entire life of bonds Less: Issue price of Bonds Total interest expense to be recognised during entire bond life $2,336,000 $2,920,000 $5,256,000 ($3,125,089) $2,130,911 Straight line interest expense for each year = $2,130,911 / 10 = $213,091 Interest expense for Year 2020 under effective interest method $217,717 The bond interest expense reported in 2020 will be greater than the amount that would be reported if the straight-line method of amortization were used.