Question
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On June 30, 2017, Crane Company issued $3,800,000 face value of 13%, 20-year bonds at $4,085,872,...
On June 30, 2017, Crane Company issued $3,800,000 face value of 13%, 20-year bonds at $4,085,872, a yield of 12%. Crane uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
a.(1) The issuance of the bonds on June 30, 2017. (2) The payment of interest and the amortization of the premium on December 31, 2017. (3) The payment of interest and the amortization of the premium on June 30, 2018. (4) The payment of interest and the amortization of the premium on December 31, 2018.
b. Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.)
c. Provide the answers to the following questions. (1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 38,548.) Interest expense reported for 2018 $ (2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The bond interest expense reported in 2018 will be the amount that would be reported if the straight-line method of amortization were used. (3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.) Total cost of borrowing over the life of the bond $ (4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used? The total bond interest expense for the life of the bond will be the total interest expense if the straight-line method of amortization were used.
Solutions
Expert Solution
| Present Value of Bonds | ||||||
| Face Value | $3,800,000 | |||||
| Coupon Rate =13%/2 | 6.50% | |||||
| PMT | $247,000 | |||||
| Nper | 40 | |||||
| Rate =12%/2 | 6.00% | |||||
| Present Value of Bonds | $4,085,872 | |||||
| Premium on Bonds | $285,872 | |||||
| A | B | C | D | E | F | G |
| Period | Interest Payment = 6.50% x face value | Interest Expenses = 6% x previous Book value | Amortization of Bonds Premium C-B | Credit Balance in bonds Premium Account | Credit Bal in Bonds Payable | Book Value of Bonds F+ E |
| June 30, 2017 | $285,872 | $3,800,000 | $4,085,872 | |||
| Dec 31,2017 | $247,000 | $245,152.32 | -$1,847.68 | $284,024.32 | $3,800,000 | $4,084,024.32 |
| June 30, 2018 | $247,000 | $245,041.46 | -$1,958.54 | $282,065.78 | $3,800,000 | $4,082,065.78 |
| Dec 31,2018 | $247,000 | $244,923.95 | -$2,076.05 | $279,989.73 | $3,800,000 | $4,079,989.73 |
| June 30, 2019 | $247,000 | $244,799.38 | -$2,200.62 | $277,789.11 | $3,800,000 | $4,077,789.11 |
| Dec 31,2019 | $247,000 | $244,667.35 | -$2,332.65 | $275,456.46 | $3,800,000 | $4,075,456.46 |
| June 30, 2020 | $247,000 | $244,527.39 | -$2,472.61 | $272,983.84 | $3,800,000 | $4,072,983.84 |
| December 31, 2020 | $247,000 | $244,379.03 | -$2,620.97 | $270,362.87 | $3,800,000 | $4,070,362.87 |
| Jun 30,2021 | $247,000 | $244,221.77 | -$2,778.23 | $267,584.65 | $3,800,000 | $4,067,584.65 |
| December 31, 2021 | $247,000 | $244,055.08 | -$2,944.92 | $264,639.73 | $3,800,000 | $4,064,639.73 |
| Jun 30,2022 | $247,000 | $243,878.38 | -$3,121.62 | $261,518.11 | $3,800,000 | $4,061,518.11 |
| December 31, 2022 | $247,000 | $243,691.09 | -$3,308.91 | $258,209.2 | $3,800,000 | $4,058,209.2 |
| Jun 30,2023 | $247,000 | $243,492.55 | -$3,507.45 | $254,701.75 | $3,800,000 | $4,054,701.75 |
| December 31, 2023 | $247,000 | $243,282.1 | -$3,717.9 | $250,983.85 | $3,800,000 | $4,050,983.85 |
| June 30, 2024 | $247,000 | $243,059.03 | -$3,940.97 | $247,042.88 | $3,800,000 | $4,047,042.88 |
| Dec 31,2024 | $247,000 | $242,822.57 | -$4,177.43 | $242,865.46 | $3,800,000 | $4,042,865.46 |
| June 30, 2025 | $247,000 | $242,571.93 | -$4,428.07 | $238,437.38 | $3,800,000 | $4,038,437.38 |
| Dec 31,2025 | $247,000 | $242,306.24 | -$4,693.76 | $233,743.63 | $3,800,000 | $4,033,743.63 |
| June 30, 2026 | $247,000 | $242,024.62 | -$4,975.38 | $228,768.24 | $3,800,000 | $4,028,768.24 |
| Dec 31,2026 | $247,000 | $241,726.09 | -$5,273.91 | $223,494.34 | $3,800,000 | $4,023,494.34 |
| June 30, 2027 | $247,000 | $241,409.66 | -$5,590.34 | $217,904 | $3,800,000 | $4,017,904 |
| December 31, 2027 | $247,000 | $241,074.24 | -$5,925.76 | $211,978.24 | $3,800,000 | $4,011,978.24 |
| Jun 30,2028 | $247,000 | $240,718.69 | -$6,281.31 | $205,696.93 | $3,800,000 | $4,005,696.93 |
| December 31, 2028 | $247,000 | $240,341.82 | -$6,658.18 | $199,038.75 | $3,800,000 | $3,999,038.75 |
| Jun 30,2029 | $247,000 | $239,942.32 | -$7,057.68 | $191,981.07 | $3,800,000 | $3,991,981.07 |
| December 31, 2029 | $247,000 | $239,518.86 | -$7,481.14 | $184,499.94 | $3,800,000 | $3,984,499.94 |
| Jun 30,2030 | $247,000 | $239,070 | -$7,930 | $176,569.93 | $3,800,000 | $3,976,569.93 |
| December 31, 2030 | $247,000 | $238,594.2 | -$8,405.8 | $168,164.13 | $3,800,000 | $3,968,164.13 |
| June 30, 2031 | $247,000 | $238,089.85 | -$8,910.15 | $159,253.98 | $3,800,000 | $3,959,253.98 |
| Dec 31,2031 | $247,000 | $237,555.24 | -$9,444.76 | $149,809.22 | $3,800,000 | $3,949,809.22 |
| June 30, 2032 | $247,000 | $236,988.55 | -$10,011.45 | $139,797.77 | $3,800,000 | $3,939,797.77 |
| Dec 31,2032 | $247,000 | $236,387.87 | -$10,612.13 | $129,185.64 | $3,800,000 | $3,929,185.64 |
| June 30, 2033 | $247,000 | $235,751.14 | -$11,248.86 | $117,936.77 | $3,800,000 | $3,917,936.77 |
| Dec 31,2033 | $247,000 | $235,076.21 | -$11,923.79 | $106,012.98 | $3,800,000 | $3,906,012.98 |
| June 30, 2034 | $247,000 | $234,360.78 | -$12,639.22 | $93,373.76 | $3,800,000 | $3,893,373.76 |
| December 31, 2034 | $247,000 | $233,602.43 | -$13,397.57 | $79,976.19 | $3,800,000 | $3,879,976.19 |
| Jun 30,2035 | $247,000 | $232,798.57 | -$14,201.43 | $65,774.76 | $3,800,000 | $3,865,774.76 |
| December 31, 2035 | $247,000 | $231,946.49 | -$15,053.51 | $50,721.24 | $3,800,000 | $3,850,721.24 |
| Jun 30,2036 | $247,000 | $231,043.27 | -$15,956.73 | $34,764.52 | $3,800,000 | $3,834,764.52 |
| December 31, 2036 | $247,000 | $230,085.87 | -$16,914.13 | $17,850.39 | $3,800,000 | $3,817,850.39 |
| Jun 30,2037 | $247,000 | $229,071.02 | -$17,928.98 | -$78.59 | $3,800,000 | $3,799,921.41 |
| (a) The issuance of the bonds | ||||||
| Cash | $4,085,872 | |||||
| Bonds Payable | $3,800,000 | |||||
| Premium on Bonds Payable | $285,872 | |||||
| (b)The payment of interest and the amortization of the premium on December 31, 2017. | ||||||
| Interest Expense | $245,152.32 | |||||
| Premium on Bonds Payable | $1,847.68 | |||||
| Cash | $247,000 | |||||
| (c) The payment of interest and the amortization of the premium on June 30, 2018 | ||||||
| Interest Expense | $245,041.46 | |||||
| Premium on Bonds Payable | $1,958.54 | |||||
| Cash | $247,000 | |||||
| (4) The payment of interest and the amortization of the premium on December 31, 2018 | ||||||
| Interest Expense | $244,923.95 | |||||
| Premium on Bonds Payable | $2,076.05 | |||||
| Cash | $247,000 |
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