1. Fast Tires issued $5,000,000 of five-year, 10% bonds on June 30, 20Y5, for $5,405,550. The...

1. Fast Tires issued $5,000,000 of five-year, 10% bonds on June 30, 20Y5, for $5,405,550. The bonds pay interest quarterly, beginning September 30, 20Y5. At the date of issuance, the market rate was 8%. Calculate the interest expense and bond amortization for the first fiscal year using the:
A.Straight-line method for amortization
B. Effective interest rate method for amortization Use the information above to prepare the journal entries to record
-the issuance
-first interest payment
-retirement of the bonds for Fast Tires.

Assume the company uses the straight-line method for amortization.

Solutions

Expert Solution

a. Straight line method:

No of quarters = 5 years * 4 = 20 quarters

Interest expense = 418890

Premium amortized = 81110

Semiannual interest date	Interest Payment [5,000,000* 10% *1/4]	Interest expense [Interest payment - Premium amortized]	Premium amortization [5405550 - 5000000] / 20	Bond carrying balance [Previous year - Premium]
				5405550
September 30, 20Y5	125000	104722.5	20277.5	5385273
December 31, 20Y5	125000	104722.5	20277.5	5364995
March 31, 20Y5	125000	104722.5	20277.5	5344718
June 30, 20Y5	125000	104722.5	20277.5	5324440
Total		418890	81110

b. Effective Interest method:

Interest expense = 430390

Premium amortized = 69610

Semiannual interest date	Interest Payment [5,000,000* 10% *1/4]	Interest expense [Carrying value8%1/4]	Premium amortization [Expense - Payment]	Bond carrying balance [Previous year - Premium]
				5405550
September 30, 20Y5	125000	108111	16889	5388661
December 31, 20Y5	125000	107773	17227	5371434
March 31, 20Y5	125000	107429	17571	5353863
June 30, 20Y5	125000	107077	17923	5335940
Total		430390	69610

Note : All figures are rounded off to the nearest dollar.

2. Using straight-line method for amortization, journal entries

Date	Account Titles	Debit	Credit
June 30, 20Y5	Cash	5405550
	Bonds Payable		5000000
	Premium on bonds payable		405550

September 30, 20Y5	Interest expense	104722.5
	Premium on bonds payable	20277.5
	Cash		125000

June 30,20Y0	Bonds Payable	5000000
	Cash		5000000

ekkarill92 answered 1 year ago

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