Question

In each of the following independent cases, the company closes its books on December 31.

Windsor Co. sells $511,000 of 10% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021.

Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end.

Prepare all of the relevant journal entries from the time of sale until December 31, 2021. (Assume that no reversing entries were made.)

Sheridan Co. sells $365,000 of 12% bonds on June 1, 2020. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2024. The bonds yield 10%. On October 1, 2021, Sheridan buys back $120,450 worth of bonds for $127,450 (includes accrued interest). Give entries through December 1, 2022.

Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end.

Schedule of Bond Discount Amortization Effective-Interest Method Bonds Sold to Yield
Date		Cash Paid		Interest Expense		Premium Amortized		Carrying Amount of Bonds
6/1/20		$		$		$		$
12/1/20
6/1/21
12/1/21
6/1/22
12/1/22
6/1/23
12/1/23
6/1/24

Prepare all of the relevant journal entries from the time of sale until December 31, 2022. (Assume that no reversing entries were made.)

Date	Account Titles and Explanation	Debit	Credit
6/1/20
12/1/20
12/31/20
6/1/21
10/1/21
	(To record interest expense and premium amortization)
10/1/21
	(To record buy back of bonds)
12/1/21
12/31/21
6/1/22
12/1/22

Answer 1

Question 1:-

a.) Issue price of the bonds

Step 1:- Calculate the issue price of the bonds

i.) Calculate the half yearly interest payment =$511,000 * 10% * 6/12 = $25,550

ii.) Calculate the present value of the bond proceeds = $511,000 * PVIF(6%, 7 periods)

We use 6% and 7 periods because the bond pays interest semi annually(so 12%/2) and there are a total of 7 periods between March 1, 2020 and September 1, 2023 :-

$511,000 * 0.6651

=$339,866

iii.) Calculate the present value of bond interest payments = $25,550 * PVIFA(6%, 7 periods)

=$25,550 * 5.5824

=$142,630

iv.) Bond proceeds = $339,866 + $142,630 = $482,496

Since the bond proceeds are lesser than the par value of the bond, the bond has been issued at a discount.

b.) Discount Amortization Schedule

The discount amortization schedule is prepared as follows:-

Date	Interest payment	Interest expense	Discount Amortization	Bond Carrying Amount
March 1, 2020				482,496
September 1, 2020	25,550	28,950	3,400	485,896
March 1, 2021	25,550	29,154	3,604	489,500
September 1, 2021	25,550	29,370	3,820	493,319
March 1, 2022	25,550	29,599	4,049	497,369
September 1, 2022	25,550	29,842	4,292	501,661
March 1, 2023	25,550	30,100	4,550	506,210
September 1, 2023	25,550	30,373	4,823	511,033

Please note that the Carrying amount of the bond as at September 1, 2023 is $33 more than the face value because of the rounding of the factors used in the time value of money calculation.

The Bond interest payment is calculated by :-

$511,000 * 10% * 6/12 = $25,550

The bond interest expense for the period is calculated by:-

Carrying value of the bond * 12% * 6/12

The difference between bond interest expense and interest payment is the discount amortization.

c.) Journal entries:-

The journal entries upto December 2021 can be recorded as follows:-

	Particulars	Debit	Credit
03/01/2020	Cash A/c	482,496
	Discount on bonds Payable A/c	28,504
	To Bonds Payable A/c		5,11,000
	(To record the issuance of bonds)
	Particulars	Debit	Credit
09/01/2020	Interest expense A/c Dr.	28,950
	To Discount on bonds Payable A/c		3,400
	To Cash A/c		25,550
	(To record the interest payment on the bonds)
	Particulars	Debit	Credit
12/31/2020	Interest Expense A/c ($29154 * 4/6)	19,436
	To Discount on bonds Payable A/c($3,604 * 4/6)		2,403
	To Interest payable A/c($25,550*4/6)		17,033
	(To record the accrual of interest on bonds)
	Particulars	Debit	Credit
03/01/2021	Interest expense A/c Dr. ($29154*2/6)	9,718
	Interest Payable A/c	17,033
	To Discount on bonds Payable A/c($3,604*2/6)		1,201
	To Cash A/c		25,550
	(To record the interest payment on the bonds)
	Particulars	Debit	Credit
09/01/2021	Interest expense A/c Dr.	29,370
	To Discount on bonds Payable A/c		3,820
	To Cash A/c		25,550
	(To record the interest payment on the bonds)
	Particulars	Debit	Credit
12/31/2021	Interest Expense A/c ($29599 * 4/6)	19,733
	To Discount on bonds Payable A/c($4049 * 4/6)		2,699
	To Interest payable A/c($25,550*4/6)		17,033
	(To record the accrual of interest on bonds)

We calculate the accrual of interest for 4 months because the interest is accrued on the bonds for the 4 months between September 1 to December 31 during each of 2020 and 2021.

Please note that i have answered the 1st question as per the Answering guidelines. Kindly request you to raise a separate request for the remaining question so that we can answer that as well. All the best and please let me know if you have any questions via comments :)