Question

On October 1st, 2018, Franklin Corporation issued $2 million of 13.5% bonds for $1,970,143.36. The bonds are due in 4 years, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%.

Use the spreadsheet included in the module section to prepare a bond interest expense and discount amortization schedule using the straight-line method.

Use the same spreadsheet to prepare a bond interest expense and discount amortization schedule using the effective interest method.

Prepare any adjusting entries for the end of the fiscal year December 31, 2018, using the:

straight-line method of amortization

effective interest method of amortization

Assume the company retired the bonds on June 30, 2019, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the straight-line method of amortization and the effective interest method of amortization.

Answer 1

1. Bond interest expense and discount amortization schedule using the straight-line method is as shown below:

	A	B	C	D	E
Semiannual Interest Period	Cash Interest Paid	Bond Interest Expense	Discount amortization	Discount	Carrying Value at end of period
	2,000,000*13.5%*6/12	A+C	29,856.64/8		E+C
0				$ 29,856.64	$1,970,143.36
1	$135,000	$138,732	$3,732.1	$26,125	$1,973,875
2	$135,000	$138,732	$3,732.1	$22,392	$1,977,608
3	$135,000	$138,732	$3,732.1	$18,660	$1,981,340
4	$135,000	$138,732	$3,732.1	$14,928	$1,985,072
5	$135,000	$138,732	$3,732.1	$11,196	$1,988,804
6	$135,000	$138,732	$3,732.1	$7,464	$1,992,536
7	$135,000	$138,732	$3,732.1	$3,732	$1,996,268
8	$135,000	$138,732	$3,732.1	($0)	$2,000,000

2. Bond interest expense and discount amortization schedule using the effective interest method is as shown below:

	A	B	C	D	E
Semiannual Interest Period	Cash Interest Paid	Bond Interest Expense	Discount amortization	Discount	Carrying Value at end of period
	2,000,000*13.5%*6/12	1,970,143.36*14%*6/12	B-A		E+C
0				$ 29,856.64	$1,970,143.36
1	$135,000	$137,910	$2,910.0	$26,947	$1,973,053
2	$135,000	$138,114	$3,113.7	$23,833	$1,976,167
3	$135,000	$138,332	$3,331.7	$20,501	$1,979,499
4	$135,000	$138,565	$3,564.9	$16,936	$1,983,064
5	$135,000	$138,814	$3,814.5	$13,122	$1,986,878
6	$135,000	$139,081	$4,081.5	$9,040	$1,990,960
7	$135,000	$139,367	$4,367.2	$4,673	$1,995,327
8	$135,000	$139,673	$4,672.9	$0	$2,000,000

3.  

Adjusting entries for the end of the fiscal year December 31, 2018, using the:

straight-line method of amortization

Year	Particulars	L.F	Debit ($)	Credit ($)
2018
Dec-31	Interest expense		69,366
	Discount on Bonds Payable (29,856.64/8)*3/6			1,866
	Interest Payable (2,000,000*13.5%*3/12)			67,500
	(For interest accrued)

Adjusting entries for the end of the fiscal year December 31, 2018, using the:

effective interest method of amortization is

Year	Particulars	L.F	Debit ($)	Credit ($)
2018
Dec-31	Interest expense (1,970,143.36*14%*3/12)		68,955
	Discount on Bonds Payable			1,455
	Interest Payable (2,000,000*13.5%*3/12)			67,500
	(For interest accrued)

4.

Journal entries to record the bond retirement using the straight-line method of amortization and the effective interest method of amortization is as shown below:

Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jun-30	Interest expense		69,366
	Discount on Bonds Payable (29,856.64/8)*3/6			1,866
	Cash (2,000,000*13.5%*3/12)			67,500
	(For interest accrued)

Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jun-30	Bonds Payable		2,000,000
	Gain on retirement of bonds			15,741
	Cash (2,000,000*.98)			1,960,000
	Discount on Bonds payable			24,259
	(for bond retired)

Effective interest:

Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jun-30	Interest expense (1,973,053*14%*3/12)		69,057
	Discount on Bonds Payable			1,557
	Cash (2,000,000*13.5%*3/12)			67,500
	(For interest accrued)

Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jun-30	Bonds Payable		2,000,000
	Gain on retirement of bonds			14,610
	Cash (2,000,000*.98)			1,960,000
	Discount on Bonds payable			25,390
	(for bond retired)