Question

Computer Inc. is one of the pioneers in the manufacture of microprocessor for computers. On April 1, 2018, Intel issued $1,600,000 of 12% face value bonds for $1,703,411.40. The bonds are due in 4 years, and pay interest semiannually on September 30 and March 31. Intel sold the bonds to yield 10%.

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

Use the same spreadsheet to prepare a bond interest expense and premium 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 retires the bonds on June 30, 2019, at 103 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

Bond interest expense and premium amortization schedule using the straight-line method is:

	A	B	C	D	E
Semiannual Interest Period	Cash Interest Paid	Bond Interest Expense	Premium amortization	Premium	Carrying Value at end of period
	1,600,000*12%*6/12	A-C	103,411.4/8		E+C
0				$ 103,411.40	$1,703,411.40
1	$96,000	$83,074	$12,926	90,484.97	1,690,484.98
2	$96,000	$83,074	$12,926	77,558.55	1,677,558.55
3	$96,000	$83,074	$12,926	64,632.12	1,664,632.13
4	$96,000	$83,074	$12,926	51,705.70	1,651,705.70
5	$96,000	$83,074	$12,926	38,779.27	1,638,779.28
6	$96,000	$83,074	$12,926	25,852.85	1,625,852.85
7	$96,000	$83,074	$12,926	12,926.42	1,612,926.43
8	$96,000	$83,074	$12,926	0.00	1,600,000.00

Bond interest expense and premium amortization schedule using the effective interest method is

	A	B	C	D	E
Semiannual Interest Period	Cash Interest Paid	Bond Interest Expense	Premium amortization	Premium	Carrying Value at end of period
	1,600,000*12%*6/12	E*10%*6/12	A-B		E+C
0				$ 103,411	$ 1,703,411
1	$96,000	$85,171	$10,829	$ 92,582	$ 1,692,582
2	$96,000	$84,629	$11,371	$ 81,211	$ 1,681,211
3	$96,000	$84,061	$11,939	$ 69,272	$ 1,669,272
4	$96,000	$83,464	$12,536	$ 56,735	$ 1,656,735
5	$96,000	$82,837	$13,163	$ 43,572	$ 1,643,572
6	$96,000	$82,179	$13,821	$ 29,751	$ 1,629,751
7	$96,000	$81,488	$14,512	$ 15,238	$ 1,615,238
8	$96,000	$80,762	$15,238	$ 0	$ 1,600,000

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

straight-line method of amortization is:

Year	Particulars	L.F	Debit ($)	Credit ($)
2018
Dec-31	Interest expense		54,463
	Premium on Bonds Payable (103,411.4/8)*3/6			6,463
	Interest Payable (1,600,000*12%*3/12)			48,000
	(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		53,415
	Premium on Bonds Payable			5,415
	Interest Payable (1,600,000*12%*3/12)			48,000
	(For interest accrued)

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

Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jun-30	Bonds Payable		1,600,000
	Premium on Bonds Payable		84,022
	Cash (1,600,000*1.03)			1,648,000
	Gain on retirement of bond			36,022
	(for bond retired)
Year	Particulars	L.F	Debit ($)	Credit ($)
2019
Jun-30	Bonds Payable		1,600,000
	Premium on Bonds Payable		86,897
	Cash (1,600,000*1.03)			1,648,000
	Gain on retirement of bond			38,897
	(for bond retired)

Premium on Bond Amortization
	Straight line method	Effective Interest
Unamortized premium	103,411	103,411
Amortized in March 2019	12,926	10,829
Amortized in June 2019	6,463	5,685
	84,022	86,897