Question

In each of the following independent cases, the company closes its books on December 31. Bridgeport Co. sells $491,000 of 8% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)

b-Prepare all of the relevant journal entries from the time of sale until the date indicated. (Assume that no reversing entries were made.)

c-Indigo Co. sells $440,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 8%. On October 1, 2018, Indigo buys back $140,800 worth of bonds for $147,800 (includes accrued interest).

Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)

Difference due to rounding

d-Prepare all of the relevant journal entries from the time of sale until the date indicated. Give entries through December 1, 2019. (Assume that no reversing entries were made.)

Answer 1

a.	Computation of discount:
	Interest payment=491000*8%*1/2=19640
	Present value of interest payment for 7 semi-annual payments @ 6%=19640*5.582381=109638
	Present value of repayment of bond on maturiy at 7th semi-annual period at 6%=491000*0.665057= 326543
	Proceeds from sale of bond=109638+326543=436181
	Discount on sale of bond=491000-436181=54819
	Bond amortization schedule:
	A	B	C	D	E	F	G
	Date	Interest payment	Interest expense	Amortization of discount	Balance in bond Discount	Balance in bond payable	Book value of bonds
		(Fce value * 8%*1/2)	(previous value in G*12%*1/2)	[C-B]	(previous value in E-D)		[F-E]
	3/1/2017				54819	491000	436181
	9/1/2017	19640	26171	6531	48288	491000	442712
	3/1/2018	19640	26563	6923	41365	491000	449635
	9/1/2018	19640	26978	7338	34027	491000	456973
	3/1/2019	19640	27418	7778	26249	491000	464751
	9/1/2019	19640	27885	8245	18004	491000	472996
	3/1/2020	19640	28380	8740	9264	491000	481736
	9/1/2020	19640	28904	9264	0	491000	491000
b.	Date	Account titles and explanation			Debit	Credit
	3/1/2017	Cash			436181
		Discount on bonds payable			54819
		Bond payable				491000
		(Sale of 8% bond at discount)
	9/1/2017	Interest expense			26171
		Discount on bonds payable				6531
		Cash				19640
		(Semi-annual interest payment paid)
	12/31/2017	Interest expense		(26563*4/6)	17709
		Discount on bonds payable				4615
		Interest payable		(19640*4/6)		13093
		(Interest payment due)
	3/1/2018	Interest expense		(26563*2/6)	8854
		Interest payable			13093
		Discount on bonds payable		(6923*2/6)		2308
		Cash				19640
		(Semi-annual interest payment paid)
	9/1/2018	Interest expense			26978
		Discount on bonds payable				7338
		Cash				19640
		(Semi-annual interest payment paid)
	12/31/2018	Interest expense		(27418*4/6)	18279
		Discount on bonds payable				5185
		Interest payable		(19640*4/6)		13093
		(Interest payment due)
	3/1/2019	Interest expense		(27418*2/6)	9139
		Interest payable			13093
		Discount on bonds payable		(7778*2/6)		2593
		Cash				19640
		(Semi-annual interest payment paid)
	9/1/2019	Interest expense			27885
		Discount on bonds payable				8245
		Cash				19640
		(Semi-annual interest payment paid)
	12/31/2019	Interest expense		(28380*4/6)	18920
		Discount on bonds payable				5827
		Interest payable		(19640*4/6)		13093
		(Interest payment due)
	3/1/2020	Interest expense		(28380*2/6)	9460
		Interest payable			13093
		Discount on bonds payable				2913
		Cash				19640
		(Semi-annual interest payment paid)
	9/1/2020	Interest expense			28904
		Discount on bonds payable				9264
		Cash				19640
		(Semi-annual interest payment paid)
	9/1/2020	Bond payable			491000
		Cash				491000
		(Repayment of bond at maturity)
c.	Computation of premium:
	Interest payment=440000*12%*1/2=26400
	Present value of interest payment for 8 semi-annual payments @ 4%=26400*6.732745=177745
	Present value of repayment of bond on maturiy at 8th semi-annual period at 4%=440000*0.73069= 321504
	Proceeds from sale of bond=177745+321504=499249
	Premium on sale of bond=499249-440000=59249
	Bond amortization schedule:
	A	B	C	D	E	F	G
	Date	Interest payment	Interest expense	Amortization of premium	Balance in bond premium	Balance in bond payable	Book value of bonds
		(Fce value * 12%*1/2)	(previous value in G*8%*1/2)	[B-C]	(previous value in E-D)		[F+E]
	6/1/2017				59249	440000	499249
	12/1/2017	26400	19970	6430	52819	440000	492819
	6/1/2018	26400	19713	6687	46132	440000	486132
	12/1/2018	26400	19445	6955	39177	440000	479177
	6/1/2019	26400	19167	7233	31944	440000	471944
	12/1/2019	26400	18878	7522	24422	440000	464422
	6/1/2020	26400	18577	7823	16599	440000	456599
	12/1/2020	26400	18264	8136	8463	440000	448463
	6/1/2021	26400	17939	8461	1	440000	440001
	* Difference of 1 is due to round off
d.	Date	Account titles and explanation			Debit	Credit
	6/1/2017	Cash			499249
		Premium on bonds payable				59249
		Bond payable				440000
		(Sale of 12% bond at premium)
	12/1/2017	Interest expense			19970
		Premium on bonds payable			6430
		Cash				26400
		(Semi-annual interest payment paid)
	12/31/2017	Interest expense		(19713*1/6)	3286
		Premium on bonds payable				1115
		Interest payable		(26400*1/6)		4400
		(Interest payment due)
	6/1/2018	Interest expense		(19713*5/6)	16428
		Interest payable			4400
		Premium on bonds payable			5573
		Cash				26400
		(Semi-annual interest payment paid)
	10/1/2018	Interest expense		(19445*0.32*4/6)	4148
		Premium on bonds payable			1484
		Cash		(140800*12%*4/12)		5632
		(interest paid on buyback)
	10/1/2018	Bond payable			140800
		Premium on bonds payable			13278
		Gain on redemption of bonds				11910
		Cash				142168
		(Buyback of bonds)
	12/1/2018	Interest expense		(19445*0.68)	13223
		Premium on bonds payable			4729
		Cash		(26400*0.68)		17952
		(Semi-annual interest payment paid)
	12/31/2018	Interest expense		(19167*0.68*1/6)	2172
		Premium on bonds payable			820
		Interest payable		(26400*0.68*1/6)		2992
		(Interest payment due)
	6/1/2019	Interest expense		(19167*0.68*5/6)	10861
		Interest payable			2992
		Premium on bonds payable			4099
		Cash		(26400*0.68)		17952
		(Semi-annual interest payment paid)
	12/1/2019	Interest expense		(18878*0.68)	12837
		Premium on bonds payable			5115
		Cash				17952
		(Semi-annual interest payment paid)
	12/31/2019	Interest expense		(18577*0.68*1/6)	2105
		Premium on bonds payable			887
		Interest payable		(26400*0.68*1/6)		2992
		(Interest payment due)
	Note:
	1. Buy back of bonds:
	Ratio of bonds bought back=140800/440000=0.32
	Segregation of interest and principal from consideration paid
	Interest for 4 months=140800*12%*4/12=5632
	Principal part in the consideration=147800-5632=142168
	Re-acquisition price				142168
	Net carriying amount of bond
	Par value			140800
	Unamortized premium
	[0.32*46132]-1484			13278	154078
	Gain on redemption				11910