Question

Grove Corporation issued $2,400,000 of 8% bonds on October 1, 2012, due on October 1, 2017. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31.

Instructions

(a)   Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method.

                                                                          Debit                       Credit            Carrying Amount

                                         Credit Cash      Interest Expense      Bond Discount            of Bonds   

        October 1, 2012                                                                                                  $2,214,672

        April 1, 2013

        October 1, 2013

(b)   Prepare the adjusting entry for December 31, 2013. Use the effective-interest method.

(c)   Compute the interest expense to be reported in the income statement for the year ended December 31, 2013.

Answer 1

a)	Amortization Schedule
		Credit Cash	Debit Interest Expense	Credit Bond Discount	Carrying Amounts of Bonds
	October 1, 2012				$2,214,672
	April 1, 2013	$96,000                        ($ 2,400,000 * 8% /2)	$1,10,733                          ($ 2,214,672 * 10% /2)	$14,733                           ($ 1,10,733 - $ 96,000)	$2,229,405                                   ($ 2,214,672 + $ 14,733)
	October 1, 2013	$96,000                            ($ 2,400,000 * 8% /2)	$1,11,471                           ($ 2,229,405 * 10% /2)	$15,471                               ($ 1,11,471 - $96,000)	$2,244,876                                     ( $ 2,229,405 + $ 15,471)
b)	Adjusting Entry For December 31, 2013
		Debit	Credit
	Interest Expense ($ 2,244,876* 10%*3/12)	$ 56121
	Interest Payable$ 96,000*1/2)		$ 48000
	Discount on Bonds Payable ($ 56121 - $ 48,000)		$ 8121
c)	Interest Expense
	From January, 2013 to April, 2013 ( $ 1,10,733*1/2)	$ 55,367
	From April, 2013 to October, 2013	$ 1,11,471
	From October, 2013 to December, 2013	$ 56,121
	Total	$ 2,22,959