Question

In: Accounting

Brief Exercise 14-8 Teton Corporation issued $731,000 of 7% bonds on November 1, 2014, for $776,913....

Brief Exercise 14-8

Teton Corporation issued $731,000 of 7% bonds on November 1, 2014, for $776,913. The bonds were dated November 1, 2014, and mature in 8 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%.

Prepare Teton’s December 31, 2014, adjusting entry

Solutions

Expert Solution

  • All working forms part of the answer
  • Effective rate is 6%, hence half yearly rate is 3%.
  • Bonds rate is 7%, hence half yearly rate is 3.5%
  • Bonds premium = 776913 – 731000 = $45,913
  • Amortisation table

Semiannual Interest Period End

Cash Interest paid $

Bond Interest Expense $

Premium Amortisation$

Unamortised Premium $

Carrying Value$

Date

A=731000 x 3.5%

B=Ex3%

C=A – B

D= D - C

E = E - C

01-11-2014

45913.00

776913.00

01-05-2015

25585.00

23307.39

2277.61

43635.39

774635.39

01-11-2015

25585.00

23239.06

2345.94

41289.45

772289.45

01-05-2016

25585.00

23168.68

2416.32

38873.14

769873.14

01-11-2016

25585.00

23096.19

2488.81

36384.33

767384.33

01-05-2017

25585.00

23021.53

2563.47

33820.86

764820.86

01-11-2017

25585.00

22944.63

2640.37

31180.48

762180.48

01-05-2018

25585.00

22865.41

2719.59

28460.90

759460.90

01-11-2018

25585.00

22783.83

2801.17

25659.73

756659.73

01-05-2019

25585.00

22699.79

2885.21

22774.52

753774.52

01-11-2019

25585.00

22613.24

2971.76

19802.75

750802.75

01-05-2020

25585.00

22524.08

3060.92

16741.84

747741.84

01-11-2020

25585.00

22432.26

3152.74

13589.09

744589.09

01-05-2021

25585.00

22337.67

3247.33

10341.76

741341.76

01-11-2021

25585.00

22240.25

3344.75

6997.02

737997.02

01-05-2022

25585.00

22139.91

3445.09

3551.93

734551.93

01-11-2022

25585.00

22036.56

3548.44

3.49

731003.49

  • Journal Entries asked and other for understanding

Date

General Journal

Dr (in $)

Cr (in $)

Working

01-11-2014

cash

776913

bonds payable

731000

premium

45913

(Bonds issued at premium)

30-11-2014

Interest expense

3885

6 months interest = 23307

Interest payable

3885

1 month = 23307/6

(Interest due and expense for Nov recorded)

30-11-2014

Premium

380

6 months premium amortised = 2278

interest expense

380

1 month amortised = 2278/6

(premium for Nov amortised)


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