Question

2.

Metlock Ltd. issued $694,200 of 15-year, 7.5% bonds on January 1, 2018, when the market interest rate was 6.5%. The cash received at the issuance of the bond was $760,086.24. Interest is payable semi-annually on July 1 and January 1. Metlock has a December 31 year end.

Prepare bond amortization schedule for the first four interest periods, using the effective-interest method. (Round answers to 2 decimal places, e.g. 15.75.) METLOCK LTD. Bond Premium Amortization Schedule Effective-Interest Method Semi-Annual Interest Period Interest Payment Interest Expense Amortization Bond Amortized Cost Issue Date, Jan. 1, 2018 $ July 1, 2018 $ $ $ $ Dec. 31, 2018 (accrual) July 1, 2019 Dec. 31, 2019 (accrual)

Record the issue of the bonds and the first interest payment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 15.75.) Date Account Titles and Explanation Debit Credit Jan. 1 July 1

Record the accrual of the interest on December 31, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 15.75.) Date Account Titles and Explanation Debit Credit Dec. 31

Show the balance sheet presentation of the bonds at December 31, 2018. METLOCK LTD. Balance Sheet (Partial) December 31, 2018For the Year Ended December 31, 2018For the Month Ended December 31, 2018 Total AssetsCurrent LiabilitiesLong-Term InvestmentsTotal Current AssetsTotal Non-Current LiabilitiesProperty, Plant and EquipmentNon-Current LiabilitiesShort-Term InvestmentsTotal Liabilities and Shareholders' EquityShareholders' EquityTotal Shareholders' EquityTotal Current LiabilitiesCurrent AssetsTotal Property, Plant and Equipment     Current Portion of Bonds Payable    Cash    Bond Interest Expense    Interest Payable    Bonds Payable     $ Long-Term InvestmentsTotal Non-Current LiabilitiesShareholders' EquityShort-Term InvestmentsTotal Shareholders' EquityProperty, Plant and EquipmentTotal Property, Plant and EquipmentTotal Current AssetsTotal AssetsTotal Current LiabilitiesTotal Liabilities and Shareholders' EquityCurrent LiabilitiesCurrent AssetsNon-Current Liabilities     Cash    Current Portion of Bonds Payable    Bond Interest Expense    Interest Payable    Bonds Payable     $

Answer 1

Face Value Rate Market Rate Period Interest payment Issue proceeds Premium $6,94,200 7.50% 6.50% 15 $26,032.50 ($694200 x 7.50%/2] $7,60,086.24 $65,886.24 ($760086.24 - $694200] The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/(premium) which will be amortised. Bond Premium Amortization Schedule Effective-Interest Method Bond Semi-Annual Interest Interest Interest Expense Amortisation Amortised Period Payment Cost (A) (B) (A) - (B) Issue Date, Jan. 1, 2018 $7,60,086.24 July 1, 2018 $26,032.50 $24,702.80 [$760086.24 x 6.50%/2] $1,329.70 $7,58,756.54 Dec. 31, 2018 (accrual) $26,032.50 $24,659.59 [$758756.54 x 6.50%/2 ] $1,372.91 $7,57,383.63 July 1, 2019 $26,032.50 $24,614.97 [$757383.63 x 6.50%/2] $1,417.53 $7,55,966.10 Dec. 31, 2019 (accrual) $26,032.50 $24,568.90 [$755966.1 x 6.50%/2] $1,463.60 $7,54,502.50

Credit Date Jan 1,2018 Debit $7,60,086.24 $65,886.24 $6,94,200.00 July 1,2018 Account Title Cash Premium on Bond Payable Bond Payable Bond Interest Expense Premium on Bond Payable Cash Bond Interest Expense Premium on Bond Payable Interest Payable $24,702.80 $1,329.70 $26,032.50 Dec 31, 2018 $24,659.59 $1,372.91 $26,032.50 Metlock Ltd Balance Sheet (Partial) December 31, 2018 Current liabilities Interest Payable $26,032.50 Long Term Liabilities Bond Payable Add: Premium on Bond Payable $6,94,200.00 $63,183.63 $7,57,383.63