Question

Exercise 14-09 On June 30, 2020, Indigo Company issued $4,380,000 face value of 14%, 20-year bonds at $5,039,020, a yield of 12%. Indigo 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. No. Date Account Titles and Explanation Debit Credit (1) June 30, 2020 (2) December 31, 2020 (3) June 30, 2021 (4) December 31, 2021 Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2021, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.) Indigo Company 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 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. Click if you would like to Show Work for this question: Open Show Work

Answer 1

No.	Date	Account titles and explanation	Debit	Credit
(1)	June 30, 2020	Cash	$5039020
		Bonds payable		$4380000
		Premium on bonds payable (5039020-4380000)		$659020
		(To record issuance of bonds)
(2)	December 31, 2020	Interest expense	$302341
		Premium on bonds payable	$4259
		Cash (4380000*14%*6/12)		$306600
		(To record interest paid and amortization of premium)
(3)	June 30, 2021	Interest expense	$302086
		Premium on bonds payable	$4514
		Cash		$306600
		(To record interest paid and amortization of premium)
(4)	December 31, 2021	Interest expense	$301815
		Premium on bonds payable	$4785
		Cash		$306600
		(To record interest paid and amortization of premium)

Interest expense= $4380000*14%*6/12= $306600

Date	Cash interest expense	Bond interest expense	Premium amortization	Unamortized premium	Carrying Value
June 30, 2020					$5039020
Dec 31, 2020	$306600	(5039020*12%*6/12)= 302341	(306600-302341)= 4259	(659020-4259)= 654761	(5039020-4259)= 5034761
June 30, 2021	$306600	(5034761*12%*6/12)= 302086	(306600-302086)= 4514	(654761-4514)= 650247	(5034761-4514)= 5030247
Dec 31, 2021	$306600	(5030247*12%*6/12)= 301815	(306600-301815)= 4785	(650247-4785)= 645462	(5030247-4785)= 5025462

2)

Indigo Company
Balance Sheet
December 31, 2021
Long term liabilities:
Bonds payable	$4380000
Premium on bonds payable	645462
Book value of bonds	$5025462

(1) What amount of interest expense is reported for 2021?

Interest expense reported for 2021= $603901 (302086+301815)

(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 than 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.

Total cost of borrowing over the life of the bond= $11604980

Total interest (4380000*14%*20)	$12264000
Par value at maturity	4380000
Total repaid	16644000
Less: amount borrowed	(5039020)
Total cost of borrowing	$11604980

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 same as the total interest expense if the straight-line method of amortization were used.