Question

On January 1, 2020, Pearl Company sold 11% bonds having a maturity value of $600,000 for $622,744, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2020, and mature January 1, 2025, with interest payable December 31 of each year. Pearl Company allocates interest and unamortized discount or premium on the effective-interest basis.

Prepare a schedule of interest expense and bond amortization for 2020–2022. (Round answer to 0 decimal places, e.g. 38,548.)

Prepare the journal entry to record the interest payment and the amortization for 2020. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Prepare the journal entry to record the interest payment and the amortization for 2022. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Bond amortization schedule:

Amortization Schedule (partial)
Date	Cash interest	Interest expense	Premium amortization	Carrying value
01/01/2020				$622,744
12/31/2020	$66,000	$62,274	$3,726	$619,018
12/31/2021	$66,000	$61,902	$4,098	$614,920
12/31/2022	$66,000	$61,492	$4,508	$610,412

• Cash interest = $600,000 x 11% = $66,000
• Interest expense = Preceding carrying value x 10%
• Premium amortization = Cash interest - Interest expense
• Carrying value = Preceding carrying value - Premium amortization

For 2020:

Date	Account title and Explanation	Debit	Credit
12/31/2020	Interest expense	$62,274
	Premium on bonds payable	$3,726
	Cash		$66,000
	[To record interest and amortization]

For 2022:

Date	Account title and Explanation	Debit	Credit
12/31/2022	Interest expense	$61,492
	Premium on bonds payable	$4,508
	Cash		$66,000
	[To record interest and amortization]