Question

Exercise 14-9 On June 30, 2017, Vaughn Company issued $4,500,000 face value of 13%, 20-year bonds at $4,838,533, a yield of 12%. Vaughn uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. 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.) (1) The issuance of the bonds on June 30, 2017. (2) The payment of interest and the amortization of the premium on December 31, 2017. (3) The payment of interest and the amortization of the premium on June 30, 2018. (4) The payment of interest and the amortization of the premium on December 31, 2018. No. Date Account Titles and Explanation Debit Credit (1) June 30, 2017 (2) December 31, 2017 (3) June 30, 2018 (4) December 31, 2018 SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT

Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.) Vaughn Company Balance Sheet December 31, 2018For the Year Ended December 31, 2018For the Quarter Ended December 31, 2018 Current AssetsCurrent LiabilitiesIntangible AssetsLong-term InvestmentsLong-term LiabilitiesProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term InvestmentsTotal Long-term LiabilitiesTotal Property, Plant and EquipmentTotal Stockholders' Equity $ Interest ExpensePremium on Bonds PayableBook Value of Bonds PayableDiscount on Notes PayableInterest PayableCashLoss on Redemption of BondsNotes PayableNotes ReceivableBad Debt Expense $ SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT

Provide the answers to the following questions. (1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 38,548.) Interest expense reported for 2018 $ (2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The bond interest expense reported in 2018 will be greater thanless thansame as the amount that would be reported if the straight-line method of amortization were used. (3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.) Total cost of borrowing over the life of the bond $ (4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used? The total bond interest expense for the life of the bond will be greater thanless thanthe same as the total interest expense if the straight-line method of amortization were used.

Answer 1

		4,500,000
		(A)	(b)	c=a-b	d=CV -c
		6.50%	6%
	Date	Cash	interest	premium	Carrying
			expense	amortized	value
	6/30/2017				4,838,533
	12/31/2017	292500	290312	2188	4,836,345
	6/30/2018	292500	290181	2319	4,834,026
	12/31/2018	292500	290042	2458	4,831,567
a)
1)	Journal Entries
	Date	Account titles & Explanations				Debit	Credit
	6/30/2017	Cash				4,838,533
		premium on bonds payable					338,533
		Bonds payable					4,500,000
2)	12/31/2017	interest expense				290312
		premium on bonds payable				2188
		cash					292500
3)	6/30/2018	interest expense				290181
		premium on bonds payable				2319
		cash					292500
4)	12/31/2018	interest expense				290042
		premium on bonds payable				2458
		cash					292500
b)		Balance Sheet (Partial )
		As on December 31,2018
	Long term liabilities
	Bonds payable			4,500,000
	Add:premium on bonds			331,567	4,831,567
c)
1)	Amount of interest expense reported for 2018					580222
2)	Greater
3)	total cost of borrowing						11361467
	total cash paid
	bonds payable				4,500,000
	interest paid (4,500,000*13%*20)				11700000	16200000
	Cash received at time of issue					-4,838,533
	total cost of borrowing					11361467
4)	Same