Question

On 1/1/2011, Shamrock Corporation issued a 10-year $2,950,000 bond with stated interest rate of 8%. Interests were payable annually on 12/31. The bond was issued for $3,157,196 cash. Shamrock used the effective interest method to amortize any bond discount/ premium using.

a. what is the interest rate for the bond?

b. Prepare journal entries on 1/1/2011 and 12/31/2011 for shamrock

c. After paying interests due on 12/31/2015, Shamrock recalled 70% of the bond at 101. Call expenses totaled $5,500. Prepare journal entries for the interest payment and retirement of the bond on 12/31/2015.

d. Assume that everything else is the same except that Shamrock amortizes any bond discount/premium using the straight-line method. redo item (c.) above.

Answer 1

Answer-

Req 1)
Market interest rate = (Issued amount / Par amount) -1 = (3157196/2950000) - 1 = 0.07 or 7%
Req 2) Journal entries:
Date	Accounts Title	Debit $	Credit $
1/1/2011	Cash	3157196
	Bond Payable		2950000
	Premium on Bond Payable		207196
	(being bonds issued at premium, at market rate 7%)
12/31/2011	Interest expense	221000
	Premium on Bond Payable	15000		(3157196*7% - 236000)
	Cash		236000
	(being interest expense booked with amortisation of premium)
Req 3)
Amortisation schedule:
	Int paid	int exp	premi. Amort,	Carrying amount
1/1/2011				3157196
12/31/2011	236000	221003.72	15000	3142196
12/31/2012	236000	219953.72	16050	3126146
12/31/2013	236000	218830.22	17170	3108976
12/31/2014	236000	217628.32	18375	3090601
12/31/2015	236000	216342.07	19660	3070941
Total			86255
Date	Accounts Title	Debit $	Credit $
12/31/2015	Interest expense	216340
	Premium on Bond Payable	19660
	Cash		236000
	(being interest expense booked with amortisation of premium)
12/31/2015	Bond Payable	2065000		(2950000*0.7)
	Premium on Bond Payable	84658.7		(3157196-2950000-86255)*0.7
	Calling expenses	5500
	Income on Calling Bonds		69508.7	(balancing figure)
	Cash		2085650	(2950000*0.7*1.01)
Req. 4) Straight line amortisation = (3157196-2950000)/10 = 20719.60
Date	Accounts Title	Debit $	Credit $
12/31/2015	Interest expense	215280.4
	Premium on Bond Payable	20719.6
	Cash		236000
	(being interest expense booked with amortisation of premium)
12/31/2015	Bond Payable	2065000		(2950000*0.7)
	Premium on Bond Payable	72518.6		(20719.60*5)*0.7
	Calling expenses	5500
	Income on Calling Bonds		57368.6	(balancing figure)
	Cash		2085650	(2950000*0.7*1.01)