Question

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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 value*8%*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 2 years ago
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