Question

On Jan. 1, 2011, James Bond Corporation issued $100,000 of 6% bonds that mature in three years with interest paid on June 30 and December 31. Prepare an amortization schedule using the effective interest method and give the necessary journal entries in 2011 in the following two cases. a) Assume the market interest rate is 4%. b) Assume the market interest rate is 8%.

Answer 1

Answer:

Requirement a: Market rate of interest = 4%

Effective Interest Amortization Table
Formula Used	(100,000*6%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (4%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
Date	cash paid	Interest Expense	Discount Amortized	Carrying value of Bond
01 January 2011		-	-	$                 105,601
30 June	$                              3,000	$                                             2,112.03	$                       (888)	$                 104,713
31 Dec	$                              3,000	$                                             2,094.27	$                       (906)	$                 103,808
30 June	$                              3,000	$                                             2,076.15	$                       (924)	$                 102,884
31 Dec	$                              3,000	2,057.68	$                       (942)	$                 101,942
30 June	$                              3,000	2,038.83	$                       (961)	$                 100,980
31 Dec	$                              3,000	2,019.61	$                       (980)	$                 100,000

date	General journal	Debit	credit
01-01-2011	cash	$ 105,601.00
	Premium on bonds payable		$      5,601.00
	bonds payable		$ 100,000.00
	(to record bond issue at )
30-06-2011	interest expense	$ 2,112.03
	premium on bonds payable	888
	interest payable		3000
	(to record amortization of bonds)
31-12-2011	interest expense	$ 2,094
	premium on bonds payable	$ 906
	interest payable		$ 3,000
	(to record amortization of bonds)

Requirement b: Market rate of interest = 8%

Effective Interest Amortization Table
Formula Used	(800,000*6%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (8%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
Date	cash paid	Interest Expense	Discount Amortized	Carrying value of Bond
01 January 2011		-	-	$                   94,758
30 June	$ 3,000	$                                             3,790.31	$                    790.31	$                   95,548
31 Dec	$ 3,000	$                                             3,821.93	$                    821.93	$                   96,370
30 June	$ 3,000	$                                             3,854.80	$                    854.80	$                   97,225
31 Dec	$ 3,000	$                                            3,889.00	$                    889.00	$                   98,114
30 June	$ 3,000	$                                            3,924.56	$                    924.56	$                   99,038
31 Dec	$ 3,000	$                                           3,961.54	$                    961.54	$                 100,000

date	General journal	Debit	credit
01-01-2011	cash	$                   94,758
	Discount on bonds payable	$ 5,242.00
	bonds payable		$ 100,000.00
	(to record bond issue at )
30-06-2011	interest expense	$ 3,790.31
	Discount on bonds payable		$ 790.31
	interest payable		$ 3,000
	(to record amortization of bonds)
31-12-2011	interest expense	$ 3,821.93
	discount on bonds payable		$ 821.93
	interest payable		$ 3,000
	(to record amortization of bonds)