Question

On June 30, 2020, Oriole Company issued $4,180,000 face value of 13%, 20-year bonds at $4,494,460, a yield of 12%. Oriole 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.) (1) The issuance of the bonds on June 30, 2020. (2) The payment of interest and the amortization of the premium on December 31, 2020. (3) The payment of interest and the amortization of the premium on June 30, 2021. (4) The payment of interest and the amortization of the premium on December 31, 2021.

Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2021, balance sheet.

Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2021? (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense reported for 2021

$

(2) Will the bond interest expense reported in 2021 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 2021 will be greater thanless thansame as 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 greater thanless thanthe same as the total interest expense if the straight-line method of amortization were used.

Answer 1

	Journal entries
Date	Particulars	Dr. ($)	Cr. ($)
30-06-20	Bank A/c                                                                            Dr.	4,494,460.00
	To 13% Bonds (Financial liability) A/c		4,180,000.00
	To Premium on bonds		314,460.00
31-12-20	Interest Expense A/c                                                    Dr.	26,338.00
	Premium on bonds A/c                                                Dr.	36,177.00
	13% Bonds (Financial liability) A/c                          Dr.	480,885.00
	To Bank A/c		543,400.00
	P&L A/c                                                                                 Dr.	26,338.00
	To Interest expense A/c		26,338.00
30-06-21	Interest Expense A/c                                                    Dr.	85,823.00
	Premium on bonds A/c                                                Dr.	32,015.00
	13% Bonds (Financial liability) A/c                          Dr.	425,562.00
	To Bank A/c		543,400.00
	P&L A/c                                                                                 Dr.	85,823.00
	To Interest expense A/c		85,823.00
31-12-21	Interest Expense A/c                                                    Dr.	138,465.00
	Premium on bonds A/c                                                Dr.	28,332.00
	13% Bonds (Financial liability) A/c                          Dr.	376,603.00
	To Bank A/c		543,400.00
	P&L A/c                                                                                 Dr.	138,465.00
	To Interest expense A/c		138,465.00
	Balance sheet (extract) as on 31/12/21
A.	EQUITY AND LIABILITIES	Amt. ($)	Amt. ($)
	Non Current Liabilities
	a. Long term borrowings
	13% bonds (Financial Liability)	2,896,950.00
	Add: Premium on bonds	217,933.00	3,114,883.00

(1) Interest expense reported for 2021 - $224288.00 (85823+138465).

(2) The interest expense would be higher by $44623.00

(3) The total finance cost would be $17241542.

Working notes:

Period	Cash flows	PVF	PV of cash flows	Amortization of premium	Interest Expense
31-12-20	$543,400	0.884956	$480,885.00	36177	$26,338.00
30-06-21	$543,400	0.783147	$425,562.00	32015	$85,823.00
31-12-21	$543,400	0.69305	$376,603.00	28332	$138,465.00
30-06-22	$543,400	0.613319	$333,277.00	25072	$185,051.00
31-12-22	$543,400	0.54276	$294,936.00	22188	$226,276.00
30-06-23	$543,400	0.480319	$261,005.00	19635	$262,760.00
31-12-23	$543,400	0.425061	$230,978.00	17376	$295,046.00
30-06-24	$543,400	0.37616	$204,405.00	15377	$323,618.00
31-12-24	$543,400	0.332885	$180,890.00	13608	$348,902.00
30-06-25	$543,400	0.294588	$160,079.00	12043	$371,278.00
31-12-25	$543,400	0.260698	$141,663.00	10657	$391,080.00
30-06-26	$543,400	0.230706	$125,366.00	9431	$408,603.00
31-12-26	$543,400	0.204165	$110,943.00	8346	$424,111.00
30-06-27	$543,400	0.180677	$98,180.00	7386	$437,834.00
31-12-27	$543,400	0.159891	$86,885.00	6536	$449,979.00
30-06-28	$543,400	0.141496	$76,889.00	5784	$460,727.00
31-12-28	$543,400	0.125218	$68,043.00	5119	$470,238.00
30-06-29	$543,400	0.110812	$60,215.00	4530	$478,655.00
31-12-29	$543,400	0.098064	$53,288.00	4009	$486,103.00
30-06-30	$543,400	0.086782	$47,157.00	3548	$492,695.00
31-12-30	$543,400	0.076798	$41,732.00	3139	$498,529.00
30-06-31	$543,400	0.067963	$36,931.00	2778	$503,691.00
31-12-31	$543,400	0.060144	$32,683.00	2459	$508,258.00
30-06-32	$543,400	0.053225	$28,923.00	2176	$512,301.00
31-12-32	$543,400	0.047102	$25,595.00	1926	$515,879.00
30-06-33	$543,400	0.041683	$22,651.00	1704	$519,045.00
31-12-33	$543,400	0.036888	$20,045.00	1508	$521,847.00
30-06-34	$543,400	0.032644	$17,739.00	1334	$524,327.00
31-12-34	$543,400	0.028889	$15,698.00	1181	$526,521.00
30-06-35	$543,400	0.025565	$13,892.00	1045	$528,463.00
31-12-35	$543,400	0.022624	$12,294.00	925	$530,181.00
30-06-36	$543,400	0.020021	$10,880.00	818	$531,702.00
31-12-36	$543,400	0.017718	$9,628.00	724	$533,048.00
30-06-37	$543,400	0.01568	$8,520.00	641	$534,239.00
31-12-37	$543,400	0.013876	$7,540.00	567	$535,293.00
30-06-38	$543,400	0.012279	$6,673.00	502	$536,225.00
31-12-38	$543,400	0.010867	$5,905.00	444	$537,051.00
30-06-39	$543,400	0.009617	$5,226.00	393	$537,781.00
31-12-39	$543,400	0.00851	$4,624.00	348	$538,428.00
30-06-40	$4,723,400	0.007531	$35,573.00	2676	$4,685,151.00
			$4,180,001.00
Period	Interest	Premium	Cash flows	Interest Expense ( as per SLM)	Interest Expense (as per Effective interest method)
31-12-20	$480,885	7862	$543,400	$54,653		26338
30-06-21	$425,562	7862	$543,400	$109,976		85823
31-12-21	$376,603	7862	$543,400	$158,935		138465
30-06-22	$333,277	7862	$543,400	$202,261		185051
31-12-22	$294,936	7862	$543,400	$240,602		226276
30-06-23	$261,005	7862	$543,400	$274,533		262760
31-12-23	$230,978	7862	$543,400	$304,560		295046
30-06-24	$204,405	7862	$543,400	$331,133		323618
31-12-24	$180,890	7862	$543,400	$354,648		348902
30-06-25	$160,079	7862	$543,400	$375,459		371278
31-12-25	$141,663	7862	$543,400	$393,875		391080
30-06-26	$125,366	7862	$543,400	$410,172		408603
31-12-26	$110,943	7862	$543,400	$424,595		424111
30-06-27	$98,180	7862	$543,400	$437,358		437834
31-12-27	$86,885	7862	$543,400	$448,653		449979
30-06-28	$76,889	7862	$543,400	$458,649		460727
31-12-28	$68,043	7862	$543,400	$467,495		470238
30-06-29	$60,215	7862	$543,400	$475,323		478655
31-12-29	$53,288	7862	$543,400	$482,250		486103
30-06-30	$47,157	7862	$543,400	$488,381		492695
31-12-30	$41,732	7862	$543,400	$493,806		498529
30-06-31	$36,931	7862	$543,400	$498,607		503691
31-12-31	$32,683	7862	$543,400	$502,855		508258
30-06-32	$28,923	7862	$543,400	$506,615		512301
31-12-32	$25,595	7862	$543,400	$509,943		515879
30-06-33	$22,651	7862	$543,400	$512,887		519045
31-12-33	$20,045	7862	$543,400	$515,493		521847
30-06-34	$17,739	7862	$543,400	$517,799		524327
31-12-34	$15,698	7862	$543,400	$519,840		526521
30-06-35	$13,892	7862	$543,400	$521,646		528463
31-12-35	$12,294	7862	$543,400	$523,244		530181
30-06-36	$10,880	7862	$543,400	$524,658		531702
31-12-36	$9,628	7862	$543,400	$525,910		533048
30-06-37	$8,520	7862	$543,400	$527,018		534239
31-12-37	$7,540	7862	$543,400	$527,998		535293
30-06-38	$6,673	7862	$543,400	$528,865		536225
31-12-38	$5,905	7862	$543,400	$529,633		537051
30-06-39	$5,226	7862	$543,400	$530,312		537781
31-12-39	$4,624	7862	$543,400	$530,914		538428
30-06-40	$35,573	7862	$4,723,400	$4,679,965		4685151
		Less:	Principal	4,180,000.00		4,180,000.00
			Interest cost	$17,241,519		$17,241,542