Question

Practice Problem 3-Amortization Schedule-Effective-Interest
In the following case, the company closes its books on December 31.
Sanford Co. sells $500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Instructions
Give entries through December 31, 2018.

Answer 1

Schedule of Bond Discount Amortization Effective Interest Method Working : Maturity value of bonds payable $5,00,000.00 Cash paid Present Value of $25000 due in 7 Periods at6% Present value of interest payable semi annually Proceeds from sale of bonds $3,32,528,00 $ 1,39,560.00 $4,72,088.00 Date Mar 01,2017 Sept 01,2017 Mar 01,2018 Sept 01,2018 Mar 01, 2019 Sept 01,2019 Mar 01,2020 Sept 01,2020 Discount on Bonds Payable Interest expense Bond discount Carrying value $ 4,72,088 $ 28,325 $ 3,325 $ 4,75,413 $ 28,525 $ 3,525 $ 4,78,938 $ 28,736 $ 3,736 $ 4,82,674 $ 28,960 $ 3,960 $ 4,86,635 $ 29,198 $ 4,198 $ 4.90,833 $ 29,450 $ 4,450 $ 4,95,283 $ 29,717 $ 4,717 $ 5,00,000 $ $ $ $ $ $ $ $ 27.912.00 25,000 25,000 25,000 25,000 25,000 25,000 25,000 Credit Date Accounts Title and Explaination Mar 01,2017 Cash Discount on Bonds Payable Bonds Payable Debit $4,72,088,00 $ 27,912.00 $ 5,00,000.00 (To Record issue of bonds) $ 28,325.00 Sept 01, 2017 Interest Expense Discount on Bonds Payable Cash (500000*10%*6/12) $ $ 3,325.00 25,000.00 (To Record interest expense) Dec 01,2017 $ 19,017 Interest Expense Discount on Bonds Payable (3525*4/6) Interest payable (500000*4/12*10%) $ $ 2,350 16,667 (To Record interest payable at year end) 9,508 16,667 $ Mar 01,2018 Interest Expense Interest payable (500000*4/12*10%) Discount on Bonds Payable (3525*2/6) Cash (500000*10%*6/12) $ $ 1,175,00 25,000.00 (To Record interest expense and payment) $ 28,736.00 Sept 01,2018 Interest Expense Discount on Bonds Payable Cash $ $ 3,736.00 25,000.00 (To Record interest expense) Dec 01,2018 $ 19,307.00 Interest Expense Discount on Bonds Payable (3960*4/6) Interest payable (500000*4/12*10%) $ $ 2,640,00 16,667 (To Record interest payable at year end)