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Jan. 1 Cash 486,000
Discount on Bonds Payable 14,000
Bonds Payable 500,000
June 30 Interest Expense 27,333.33
and Discount on Bonds Payable [($14,000
Dec. 31 36 months) 6 months] 2,333.33
Cash ($500,000 0.10 6/12) 25,000.00
E14-7 Effective Interest Discount Amortization Chowan Corporation issued $100,000 of 10% bonds dated January 1, 2016, for $96,832.72 on January 1, 2016. The bonds are due December 31, 2019, were issued to yield 11%, and pay interest semiannually on June 30 and December 31. Chowan uses the effective interest method of amortization.
Required: Prepare the journal entries to record the issue of the bonds on Jan. 1, 2016, and the interest payments on June 30, 2016, Dec. 31, 2016, and June 30, 2017. In addition, prepare an amortization schedule for the bonds through June 30, 2017.
2016
Jan. 1 Cash 96,832.72
Discount on Bonds Payable 3,167.28
Bonds Payable 100,000.00
CHOWAN CORPORATION
Bond Interest Expense and
Discount Amortization Schedule (Partial)
Effective Interest Method
10% Bonds Sold to Yield 11%
Interest Unamortized
Cash Expense Discount BV
Date Credita Debitb Creditc of Bondsd
01/01/16 $96,832.72
06/30/16 $5,000 $5,325.80 $325.80 97,158.52
12/31/16 5,000 5,343.72 343.72 97,502.24
06/30/17 5,000 5,362.62 362.62 97,864.86
a$100,000 0.10 ½ year
bPrevious book value 0.11 ½ year
cAmount from footnote b – $5,000
dPrevious book value + Amount from footnote c
2016
June 30 Interest Expense 5,325.80
Discount on Bonds Payable 325.80
Cash 5,000.00
Dec. 31 Interest Expense 5,343.72
Discount on Bonds Payable 343.72
Cash 5,000.00
2017
June 30 Interest Expense 5,362.62
Discount on Bonds Payable 362.62
Cash 5,000.00
OMIT E14-8 Effective Interest Premium Amortization Polk Incorporated issued $200,000 of 13% bonds on July 1, 2016, for $206,801.60. The bonds were dated January 1, 2016, pay interest on each June 30 and December 31, are due December 31, 2020, and were issued to yield 12%. Polk uses the effective interest method of amortization.
Required: Prepare the journal entries to record the issue of the bonds on July 1, 2016, and the interest payments on December 31, 2016, and June 30, 2017. In addition, prepare a bond interest expense and premium amortization schedule for the bonds through June 30, 2017.
2016
July 1 Cash 206,801.60
Premium on Bonds Payable 6,801.60
Bonds Payable 200,000.00
POLK INCORPORATED
Bond Interest Expense and
Premium Amortization Schedule (Partial)
Effective Interest Method
13% Bonds Sold to Yield 12%
Interest Unamortized
Cash Expense Premium Book Value
Date Credita Debitb Debitc of Bondsd
07/01/16 $206,801.60
12/31/16 $13,000 $12,408.10 $591.90 206,209.70
06/30/17 13,000 12,372.58 627.42 205,582.28
a$200,000 0.13 ½ year
bPrevious book value 0.12 ½ year
c$13,000 – Amount from footnote b
dPrevious book value – Amount from footnote c
Dec. 31 Interest Expense 12,408.10
Premium on Bonds Payable 591.90
Cash 13,000.00
2017
June 30 Interest Expense 12,372.58
Premium on Bonds Payable 627.42
Cash 13,000.00
E14-10 Bond Amortization Tables On January 1, 2016, Calvert Company issues 12%, $100,000 face value bonds for $103,545.91, a price to yield 10%. The bonds mature on December 31, 2017. Interest is paid semiannually on June 30 and December 31. Required:
1. Prepare a bond interest expense and premium amortization schedule using the straight-line method.
2. Prepare an amortization schedule using the effective interest method.
3. Prepare the journal entries to record the interest payments on June 30, 2016, and December 31, 2016, using both methods.
1. CALVERT COMPANY
Bond Interest Expense and
Premium Amortization Schedule
Straight-Line Method
Interest Unamortized
Cash Expense Premium Book Value
Date Credita Debitb Debitc of Bondsd
01/01/16 $103,545.91
06/30/16 $6,000 $5,113.52 $886.48 102,659.43
12/31/16 6,000 5,113.52 886.48 101,772.95
06/30/17 6,000 5,113.52 886.48 100,886.47
12/31/17 6,000 5,113.53e 886.47 100,000.00
a$100,000 0.12 ½ year
b$6,000 – $886.48
c($103,545.91 – $100,000) 4
dPrevious book value – Amount from footnote b
eDifference of $0.01 due to rounding
2. CALVERT COMPANY
Bond Interest Expense and
Premium Amortization Schedule
Effective Interest Method
12% Bonds Sold to Yield 10%
Interest Unamortized
Cash Expense Premium Book Value
Date Credita Debitb Debitc of Bondsd
01/01/16 $103,545.91
06/30/16 $6,000 $5,177.30 $822.70 102,723.21
12/31/16 6,000 5,136.16 863.84 101,859.37
06/30/17 6,000 5,092.97 907.03 100,952.34
12/31/17 6,000 5,047.66e 952.34 100,000.00
a$100,000 0.12 ½ year
bPrevious book value 0.10 ½ year
c$6,000 – Amount from footnote b
dPrevious book value – Amount from footnote c
eDifference of $0.04 due to rounding
3. Straight-Line Method
2016
June 30 Interest Expense 5,113.52
Premium on Bonds Payable 886.48
Cash 6,000.00
Dec. 31 Interest Expense 5,113.52
Premium on Bonds Payable 886.48
Cash 6,000.00
Effective Interest Method
2016
June 30 Interest Expense 5,177.30
Premium on Bonds Payable 822.70
Cash 6,000.00
Dec. 31 Interest Expense 5,136.16
Premium on Bonds Payable 863.84
Cash 6,000.00
E14-13 Redemption of Bonds Prior to Maturity Hill Corporation issued $1,500,000 of
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