Question

In: Accounting

On January 1, 2019, Hawthorne Corporation issued for $155,989, 5-year bonds with a face amount of...

On January 1, 2019, Hawthorne Corporation issued for $155,989, 5-year bonds with a face amount of $150,000 and a stated (or coupon) rate of 9%. The bonds pay interest annually and have an effective interest rate of 8%. Assume Hawthorne uses the effective interest rate method.

Required:
1. Prepare the entry to record the sale of the bonds.
2. Calculate the amount of the interest payments for the bonds.
3. Prepare the amortization table through 2020.
4. Prepare the journal entry for December 31, 2019, to record the payment of interest and the related interest expense.
5. Calculate the annual interest expense for 2019 and 2020.

Solutions

Expert Solution

Basic details

Coupon rate per Period

9.00%

Face value of bond

150,000

Market or Discounting rate per Period

8.00%

Interest payments for the bonds (Answer 2) (150000*9%)

13500

Payment at end of period with Face value(150000+13500)

163,500

Interest paid on

Annually

Present Value of bond

Period

Payment

Discounting Factor @ 8%

Present Value

1

13500

0.925926

           12,500

2

13500

0.857339

           11,574

3

13500

0.793832

           10,717

4

13500

0.735030

             9,923

5

163,500

0.680583

         111,275

Present value of Bond

         155,989

Less: face value of Bond

         150,000

Premium on Bond payable

             5,989

Fair value

Interest payment (Credit Cash) = Face value of bond * Coupon rate

Interest Expense (Debit Interest Expense) = book value of Bond for previuos period * Market or Discounting rate

Amortization of bond premium (Debit Bond Premium) = Interest payment - Interest Expense

Credit Balance in Bond premium = Credit Balance in Bond premium for previous period - Amortization of bond premium

Credit Balance in Bond Payable = Face value of bond

Book value of Bond = Credit Balance in Bond premium + Credit Balance in Bond Payable

Bond Premium Amortization Table

Credit Balance in Bond premium at end of retirement of bond payable must be Zero.

Period

Date

Interest payment (Cash paid) @ 9%

Interest Expense @ 8%

Amortization of bond premium

Credit Balance in Bond premium

Credit Balance in Bond Payable

Book (carrying) value of Bond

0

January 1, 2019

5989

150000

155989

1

December 31, 2019

13500

12479

1021

4968

150000

154968

2

December 31, 2020

13500

12397

1103

3866

150000

153866

3

December 31, 2021

13500

12309

1191

2675

150000

152675

4

December 31, 2022

13500

12214

1286

1389

150000

151389

5

December 31, 2023

13500

12111

1389

0

150000

150000

Annual interest expense for 2019

12479

Annual interest expense for 2020

12397

Journal entries

Date

Account title

Debit

Credit

January 1, 2019

Cash

155989

Bond payable

150000

Premium on bond payable

5989

(To record issued of bond payable at Premium.)

December 31, 2019

Interest expense

12479

Premium on bond payable

1021

Cash

13500

(To record interest expense and amortization of bond premium.)

December 31, 2020

Interest expense

12397

Premium on bond payable

1103

Cash

13500

(To record interest expense and amortization of bond premium.)

ekkarill92 answered 3 years ago
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