Question

Problem #1: The following amortization and interest schedule reflects the issuance of 8-year bonds by Hammerhead Corporation on January 1, 2013, and the subsequent interest payments:

Amortization Schedule

Year	Cash	Interest	Amount Unamortized	Carrying Value
1/1/2013			$16,158	$266,158
2013	$15,000	$13,308	14,466	264,466
2014	15,000	13,223	12,689	262,689
2015	15,000	13,134	10,824	260,824
2016	15,000	13,041	8,865	258,865
2017	15,000	12,943	6,808	256,808
2018	15,000	12,840	4,649	254,649
2019	15,000	12,732	2,381	252,381
2020	15,000	12,619		250,000

Instructions

1. Indicate whether the bonds were issued at a premium or a discount.
2. Determine the stated interest rate and the effective-interest rate.
3. On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2013.
4. On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2013. (Interest is paid January 1.)

Answer 1

Solution:

Requirement:A

1) Bonds are issued at premium.

2) IBecause initial carrying value in 2013 is $266,158 which is more than face value of bond of $ 250,000

Requirement:B

1) Stated Interest Rate = Interest Cash Paid / Face Value of Bond = $15000 / $250000 = 6%

2) Effective Interest Rate = Interest Expense Recorded / Carrying Value of Bond = $ 13308 / $ 266158 = 5%

Requirement:C

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2013	Cash	$         266,158
	Premium on Bonds Payable		$             16,158
	Bonds Payable		$           250,000
	(To record bond issued at premium )

Requirement:D

Date	Account Titles and Explanation	Debit	Credit
Dec. 31,2013	Interest Expense	$           13,308
	Premium on Bonds Payable [16158-14466]	$             1,692
	Interest Payable		$             15,000
	( To record interest expense Payable)