Question

*Problem 14-1 Your answer is partially correct. Try again. The following amortization and interest schedule reflects the issuance of 10-year bonds by Riverbed Corporation on January 1, 2011, and the subsequent interest payments and charges. The company's year-end is December 31, and financial statements are prepared once yearly. Amortization Schedule Amount Unamortized Year Cash Interest 1/1/2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $13,695 13,695 13,695 13,695 13,695 13,695 13,695 13,695 13,695 13,695 $14,096 14,144 14,198 14,258 14,326 14,401 14,486 14,581 14,687 14,808 $7,035 6,634 6,185 5,682 5,119 4,488 3,782 2,991 2,105 1,113 Carrying Value $ 117,465 117,866 118,315 118,818 119,381 120,012 120,718 121,509 122,395 123,387 124,500 (a) Indicate whether the bonds were issued at a premium or a discount. biscount (b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method. Effective interest method (c) Determine the stated interest rate and the effective-interest rate. (Round answers to 0 decimal places, e.g. 18%.) The stated rate X The effective rate 11 (d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011. (If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit Date lanuary 1, 200 Account Titles and Explanation h

Answer 1

Ans a The bond were issued at discount. Amount payable at maturity i.e. carrying value in year 2020: Less: Carrying Value on 01/11/2011 (Bond issue date) Discount on issue of bond $1,24,500 ($1,17,465) $7,035 Ans b 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. As per the Straight line amortization every year amortization amount should be $703.50. In effective interest amortization, each year amortized amount is based on opening carrying value multiplied by the effective interest rate. In this every year amount will not be same and if bond issued at discount/premium then the amortized amount charged to income statement will keep on increasing/decreasing respectively. Based on the above discussion, it can be said that the Amortization schedule is based on Effective-interest method Ans c Stated interest rate is the rate based on which the bondholders were paid interest every period (semi-annually, yearly) during the life of the bond. Interest paid = Face Value x Stated Interest Rate $13695 = $124500 x Stated Interest Rate Stated Interest Rate = $13695/$124500 Stated Interest Rate = 11% Effective Interest rate is the rate based on which the Bond issuer to record interest expense in his books every period. It is also called as the market rate. It is calculated on the opening carrying value every year till the maturity of the bond. Interest Expense = Opening Carrying Value x Effective Interest rate For 2011, interest expense is $14096 $14096 = $117465 x effective interest rate Effective interest rate = $14096/$117465 Effective interest rate = 12%

For calculating 2012 interest expense, Opening Carrying value: $117866 Interest Expense = $117866 x 12% = $14144 (Which is as per the table provided) Date Ans d January 1, 2011 $1,24,500 Ans e December 31, 2011 $401 $13,695 Particulars Debit Credit Cash $1,17,465 Discount on Bond Payable $7,035 Bond Payable (To Record issue of bond at discount) Interest Expense $14,096 Discount on Bond Payable Interest Payable (To Record interest expense and amortization of discount on bond) Interest Payable $13,695 Cash (To Record payment of Bond Interest) Interest Expense $14,581 Discount on Bond Payable Interest Payable (To Record interest expense and amortization of discount on bond) Ans f January 1, 2018 $13,695 December 31, 2018 $886 $13,695