Question
In: Accounting
On January 1, 2020, Flanagin Corporation issued $5,000,000 face value, 8%, 10-year-bonds at $4,376,892. The price...
On January 1, 2020, Flanagin Corporation issued $5,000,000 face value, 8%, 10-year-bonds at $4,376,892. The price resulted in a 10% effective-interest rate on the bonds. Flanagin uses the effective interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1.
Prepare the journal entry to record the following
transactions:
The issuance of bonds on January 1, 2020.
Accrual of interest and amortization of the discount
on December 31, 2020. (1.5 marks)
The payment of interest on January 1, 2021. (1
mark)
Accrual of interest and amortization of the premium on
December 31, 2021. (1.5 marks)
Show the non-current liabilities section on the
statement of financial position for the bond liability at December
31, 2021. (1 mark)
Compute the total cost of borrowing over the life of
the bond. (1 mark)
How much would be bond interest expense on December
31, 2021 if the straight line method of amortization were used? (1
mark)
Solutions
Expert Solution
| Face Value of the bonds | 50,00,000.00 |
| Issue price of Bonds | 43,76,892.00 |
| Discount | 6,23,108.00 |
1.The Discount of 6,23,108/- should be amortised over the period of bonds(10 yrs)
2.The effective interest rate is the market interest rate on the date that the bonds were issued.in this case, 10%
3.The company should make payment of interest for every year (50,00,000*8%)
The Difference between the interest of 2 and 3 should be Amortisation amount
| Amortisation Table | ||||||
| A | B | C | D | E | F | G |
| Date | Interest Payment Stated | Interest Expense | Amortisation of Bonds (C-B) | Debit Balance in Bonds Discount | Credit the Balance in the Bonds Payable | Book value of the bonds(F-E) |
| 8% *Face | Mkt 10% * Previous Book value(G) | |||||
| January 1,2020 | 6,23,108.00 | 50,00,000.00 | 43,76,892.00 | |||
| December 31,2020 | 4,00,000.00 | 4,37,689.20 | 37,689.20 | 5,85,418.80 | 50,00,000.00 | 44,14,581.20 |
| December 31,2021 | 4,00,000.00 | 4,41,458.12 | 41,458.12 | 5,43,960.68 | 50,00,000.00 | 44,56,039.32 |
| December 31,2022 | 4,00,000.00 | 4,45,603.93 | 45,603.93 | 4,98,356.75 | 50,00,000.00 | 45,01,643.25 |
| December 31,2023 | 4,00,000.00 | 4,50,164.33 | 50,164.33 | 4,48,192.42 | 50,00,000.00 | 45,51,807.58 |
| December 31,2024 | 4,00,000.00 | 4,55,180.76 | 55,180.76 | 3,93,011.67 | 50,00,000.00 | 46,06,988.33 |
| December 31,2025 | 4,00,000.00 | 4,60,698.83 | 60,698.83 | 3,32,312.83 | 50,00,000.00 | 46,67,687.17 |
| December 31,2026 | 4,00,000.00 | 4,66,768.72 | 66,768.72 | 2,65,544.11 | 50,00,000.00 | 47,34,455.89 |
| December 31,2027 | 4,00,000.00 | 4,73,445.59 | 73,445.59 | 1,92,098.53 | 50,00,000.00 | 48,07,901.47 |
| December 31,2028 | 4,00,000.00 | 4,80,790.15 | 80,790.15 | 1,11,308.38 | 50,00,000.00 | 48,88,691.62 |
| December 31,2029 | 4,00,000.00 | 5,11,308.38 | 1,11,308.38 | - | 50,00,000.00 | 50,00,000.00 |
| 40,00,000.00 | 46,23,108.00 | 6,23,108.00 |
| JOURNAL ENTRIES | |||
| Date | Particulars | Debit | Credit |
| January 1,2020 | Bank | 43,76,892.00 | |
| Discount on Bonds Payable | 6,23,108.00 | ||
| 8% Bonds Payable | 50,00,000.00 | ||
| (Being 8 % Bonds Issued at a discount) | |||
| December 31,2020 | Interest Expense | 4,37,689.20 | |
| Discount on Bonds Payable | 37,689.20 | ||
| Interest Payable on Bonds | 4,00,000.00 | ||
| (Being Accrual Accounted for Interest expense and Amortisation of Bonds) | |||
| January 1,2021 | Interest Payable on Bonds | 4,00,000.00 | |
| Bank | 4,00,000.00 | ||
| (Being Interest paid) | |||
| December 31,2021 | Interest Expense | 4,41,458.12 | |
| Discount on Bonds Payable | 41,458.12 | ||
| Interest Payable on Bonds | 4,00,000.00 | ||
| (Being Accrual Accounted for Interest expense and Amortisation of Bonds) |
2.
| Non Current Liability | |
| 8% Bonds Payable | 50,00,000.00 |
| Current Liability | |
| Interest Payable on Bonds | 4,00,000.00 |
3.
| Total cost of Bonds over the period of Borrowing | 46,23,108.00 | *refer the above table |
4.
Under the straight-line method the interest expense remains at a constant amount even though the book value of the bond is increasing
| Straight Line Method | ||||
| Year | Interest Expense(A) | Interest (B) | Amortisation of bonds(C) | Book Value at the end of the year(D) |
| December 31,2020 | 4,62,310.80 | 4,00,000.00 | 62,310.80 | 44,39,202.80(43,76892+62,310.8) |
| December 31,2021 | 4,62,310.80 | 4,00,000.00 |
&
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