Straight line amortization of bond premium

CHAPTER 14
Financing Liabilities: Bonds and LT Notes Payable

SOLUTIONS TO EXERCISES

E14-1 Determining the Proceeds from Bond Issues.

Madison Corporation is authorized to issue $500,000 of 5-year bonds dated June 30, 2016, with a stated rate of interest of 11%. Interest on the bonds is payable semiannually, and the bonds are sold on June 30, 2016.

Required: Determine the proceeds that the company will receive if it sells (1) the bonds to yield 12% and (2) the bonds to yield 10%.

1. (Factors from Tables 3 and 4 of the TVM Module)

n = 10, i = 0.06

PV of Principal ($500,000 0.558395) = $279,179.50

PV of Interest + ($27,500 7.360087) = 202,402.39

$481,581.89

OMIT 2. (Factors from Tables 3 and 4 of the TVM Module)

n = 10, i = 0.05

PV of Principal ($500,000 0.613913) = $306,956.50

PV of Interest + ($27,500 7.721735) = 212,347.71

$519,304.21

E14-3 Recording Bond Issue and Interest Payments Burris Corporation is authorized to issue $800,000 of 9% bonds. Interest on the bonds is payable semiannually; the bonds are dated January 1, 2016, and are due December 31, 2020.
Required: Prepare the journal entries to record the following:

a.

April 1, 2016

Sold the bonds at par (100) plus accrued interest

b.

June 30, 2016

First interest payment

c.

December 31, 2016

Second interest payment

2016

a. Apr. 1 Cash 818,000

Interest Expense ($800,000 0.09 3/12)* 18,000

Bonds Payable 800,000

*Alternatively, Interest Payable could be credited.

b. June 30 Interest Expense ($800,000 0.09 6/12)* 36,000

Cash 36,000

*Alternatively, if Interest Payable was credited on April 1, 2016, Interest Expense would be debited for $18,000, and Interest Payable would be debited for $18,000.

c. Dec. 31 Interest Expense ($800,000 0.09 6/12) 36,000

Cash 36,000

E14-5 Straight-Line Premium Amortization On January 1, 2016, Hackman Corporation issued $1 million face value 12% bonds dated January 1, 2016, for $1,023,000. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2020. Hackman uses the straight-line amortization method.

Required: Record the issuance of the bonds and the first two interest payments.

2016

Jan. 1 Cash 1,023,000

Bonds Payable 1,000,000

Premium on Bonds Payable 23,000

June 30 Interest Expense 57,700

Premium on Bonds Payable [($23,000

60 months) 6 months] 2,300

Cash ($1,000,000 0.12 6/12) 60,000

Dec. 31 Interest Expense 57,700

Premium on Bonds Payable [($23,000

60 months) 6 months] 2,300

Cash ($1,000,000 0.12 6/12) 60,000

OMIT E14-6 Straight-Line Discount Amortization Bryan Company issued $500,000 of 10% face value bonds on January 1, 2016, for $486,000. The bonds are due December 31, 2018, and pay interest semiannually on June 30 and December 31. Bryan uses the straight-line amortization method.
Required: Prepare the journal entries to record the issuance of the bonds and the first two interest payments.

2016

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 11% bonds at 98 on January 2, 2014. Interest is paid semiannually on June 30 and December 31. The bonds had a 10-year life from the date of issue, and the company uses the straight-line method of amortization. On March 31, 2017, Hill recalls the bonds at the call price of 107 plus accrued interest.
Required: Prepare the journal entries to record the reacquisition (recall) of Hill's bonds.

2017

Mar. 31 Interest Expense 42,000

Discount on Bonds Payable ($250* 3 months) 750

Interest Payable ($1,500,000 0.11 3/12) 41,250

*$1,500,000 0.98 = $1,470,000 $ 1,500,000

(1,470,000)

$ 30,000 discount

$30,000 discount

120 months

= $250 discount amortization per month

31 Bonds Payable 1,500,000

Loss on Bond Redemptiona 125,250

Interest Payable 41,250

Discount on Bonds Payable 20,250

Cash [($1,500,000 1.07) + $41,250] 1,646,250

aCall price ($1,500,000 1.07) $ 1,605,000

Less: Face value $1,500,000

Unamortized discount (20,250)b (1,479,750)

Loss on bond redemption $ 125,250

bMarch 31, 2017 $250 39 lapsed months = $9,750 previously amortized discount

$30,000 Total discount to be amortized

(9,750) Previously amortized discount

$20,250 Unamortized discount

E14-23 Long-Term Notes Payable On January 1, 2016, Johnson Corporation issued a 2-year note due December 31, 2017, with a face value of $10,000, receiving $7,694.68 in exchange.
Required: Prepare the journal entries to account for the note: 1. on the date the note is issued, 2. at the end of 2016, 3. at the end of 2017.

1. 2016

Jan. 1 Cash 7,694.68

Discount on Notes Payable 2,305.32

Notes Payable 10,000.00

2. 2016

Dec. 31 Interest Expense ($7,694.68 0.14*) 1,077.26

Discount on Notes Payable 1,077.26

*$7,694.68 = $10,000 PV factor (n = 2, i = ?)

0.769468 = PV factor (n = 2, i = ?)

i = 14%, from Table 3 of the TVM Module

3. 2017

Dec. 31 Notes Payable 10,000.00

Interest Expense 1,228.06

Discount on Notes Payable

[($7,694.68 + $1,077.26) 0.14] 1,228.06*

Cash 10,000.00

*Difference of $0.01 due to rounding

OMIT E14-25 Exchange of a Note Payable for an Asset Webb Corporation purchased an asset from Shaw Corporation on January 1, 2016. Shaw accepted a 3-year, non-interest-bearing note of $18,000 due December 31, 2018, in exchange for the asset. Neither the fair value of the asset nor that of the note is available. Webb's incremental borrowing rate is 12%.
Required: Prepare the journal entries to record the issuance of the note, retirement, and any interest expense on the books of Webb on each of the following dates:

1. January 1, 2016

2. December 31, 2016

3. December 31, 2017

4. December 31, 2018

1. 2016

Jan. 1 Asset ($18,000 0.711780*) 12,812.04

Discount on Notes Payable 5,187.96

Notes Payable 18,000.00

*Factor for n = 3, i = 0.12 from Table 3 of the TVM Module

2. 2016

Dec. 31 Interest Expense 1,537.44

Discount on Notes Payable

($12,812.04 0.12) 1,537.44

3. 2017

Dec. 31 Interest Expense 1,721.94

Discount on Notes Payable

[($12,812.04 + $1,537.44) 0.12] 1,721.94

4. 2018

Dec. 31 Notes Payable 18,000.00

Interest Expense 1,928.58

Discount on Notes Payable [($12,812.04 +

$1,537.44 + $1,721.94) 0.12] 1,928.58*

Cash 18,000.00

*Difference of $0.01 due to rounding