Question

On June 1, 2016, Everly Bottle Company sold $3,000,000 in long-term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.

- Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31.

- Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31 is as calculated below:

	A	B	C	D	E
Date	Cash Paid	Interest Expense	Increase in Carrying Value	Unamortized Discount	Carrying Value
	3,000,000*8%	E*10%	B-A	D-C	E+C
0				$368,700	$2,631,300
1	$240,000	$263,130	$23,130	$345,570	$2,654,430
2	$240,000	$265,443	$25,443	$320,127	$2,679,873
3	$240,000	$267,987	$27,987	$292,140	$2,707,860
4	$240,000	$270,786	$30,786	$261,354	$2,738,646
5	$240,000	$273,865	$33,865	$227,489	$2,772,511
6	$240,000	$277,251	$37,251	$190,238	$2,809,762
7	$240,000	$280,976	$40,976	$149,262	$2,850,738
8	$240,000	$285,074	$45,074	$104,188	$2,895,812
9	$240,000	$289,581	$49,581	$54,607	$2,945,393
10	$240,000	$294,539	$54,606	$0	$3,000,000

Adjusting entry to be made on December 31, 2018 is:

Year	Particulars	L.F	Debit ($)	Credit ($)
2018
Dec-31	Interest Expense (2,679,873*10%*7/12)		156,326
	Discount on Bonds Payable			16,326
	Interest Payable (3,000,000*8%*7/12)			140,000
	(For interest accrued for 7 months)