Question

On January 1, 2016, Calvert Company issues 9%, $100,000 face value bonds for $103,673.08, a price to yield 7%. 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 a bond interest expense and premium 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.

Answer 1

Requirement 1:

Amortization Schedule (Straight-Line)
Year	Cash interest	Interest expense	Premium Amortization	Carrying amount
01/01/2016				$103,673.80
06/30/2016	$4,500.00	$3,581.55	$918.45	$102,755.35
12/31/2016	$4,500.00	$3,581.55	$918.45	$101,836.90
06/30/2017	$4,500.00	$3,581.55	$918.45	$100,918.45
12/31/2017	$4,500.00	$3,581.55	$918.45	$100,000.00

Cash interest = $1,000,000 x 4.5% = $4,500,000

Premium Amortization = (103,673.80-100,000) ÷ 4 payment periods = $918.45

interest expense = Cash interest - Premium amortization

Carrying amount = Preceding carrying amount - Premium amortization

Requirement 2:

Amortization Schedule (Effective interest)
Year	Cash interest	Interest expense	Amortization	Carrying amount
01/01/2016				$103,673.80
06/30/2016	$4,500.00	$3,628.58	$871.42	$102,802.38
12/31/2016	$4,500.00	$3,598.08	$901.92	$101,900.47
06/30/2017	$4,500.00	$3,566.52	$933.48	$100,966.98
12/31/2017	$4,500.00	$3,533.84	$966.16	$100,000.83

Cash interest = $1,000,000 x 4.5% = $4,500,000

interest expense = Preceding carrying amount x 3.5%

Premium Amortization = Cash interest - Interest expense

Carrying amount = Preceding carrying amount - Premium amortization

Requirement 3:

Straight-line

Date	Account title and Explanation	Debit	Credit
June 30,2016	Interest expense	$3,581.55
	Premium on amortization of bonds	$918.45
	Cash		$4,500
	[To record interest expense]
Dec 31,2016	Interest expense	$3,581.55
	Premium on amortization of bonds	$918.45
	Cash		$4,500
	[To record interest expense]

Effective interest:

Date	Account title and Explanation	Debit	Credit
June 30,2016	Interest expense	$3,628.58
	Premium on amortization of bonds	$871.42
	Cash		$4,500
	[To record interest expense]
Dec 31,2016	Interest expense	$3,628.58
	Premium on amortization of bonds	$901.92
	Cash		$4,500
	[To record interest expense]