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On January 1, 2016, Gates Corporation issued $100,000 of 5-year bonds due December 31, 2020, for...

On January 1, 2016, Gates Corporation issued $100,000 of 5-year bonds due December 31, 2020, for $103,604.79 minus debt issuance costs of $3,000. The bonds carry a stated rate of interest of 13% payable annually on December 31 and were issued to yield 12%. The company uses the effective interest method of amortization to amortize any discounts or premiums and the straight-line method to amortize the debt issuance costs.

Required: Prepare the journal entries to record the issuance of the bonds, all the interest payments, premium amortizations, debt issuance cost amortizations, and the repayment of the bonds.

Solutions

Expert Solution

Step 1: Prepare Amortization Table

The amortization table is prepared as below:

Gates Corporation
Amortization Schedule
Effective Interest Method
Date Cash (A) Interest Expense (B) Unamortized Premium (A-B) Book Value of Bonds
Jan 01, 2016 103,604.79
Dec 31, 2016 13,000 12,432.57 (103,604.79*12%) 567.43 103,037.36 (103,604.79 - 567.43)
Dec 31, 2017 13,000 12,364.48 (103,037.36*12%) 635.52 102,401.85 (103,037.36 - 635.52)
Dec 31, 2018 13,000 12,288.22 (102,401.85*12%) 711.78 101,690.07 (102,401.85 - 711.78)
Dec 31, 2019 13,000 12,202.81 (101,690.07*12%) 797.19 100,892.88 (101,690.07 - 797.19)
Dec 31, 2020 13,000 12,107.13 (100,892.88*12% rounded of to .13) 892.87 100,000.00 (100,892.88 - 892.87)

______

Step 2: Prepare Journal Entries

The journal entries are prepared as below:

Date Account Titles Debit Credit
Jan 01, 2016 Cash $100,604.79
Deferred Bond Issue Costs $3,000.00
Bonds Payable $100,000.00
Premium on Bonds Payable $3,604.79
Dec 31, 2016 Interest Expense (12,432.57 + 600) $13,032.57
Premium on Bonds Payable $567.43
Cash $13,000.00
Deferred Bond Issue Costs (3,000/5) $600.00
Dec 31, 2017 Interest Expense (12,364.48 + 600) $12,964.48
Premium on Bonds Payable $635.52
Cash $13,000.00
Deferred Bond Issue Costs (3,000/5) $600.00
Dec 31, 2018 Interest Expense (12,288.22 + 600) $12,888.22
Premium on Bonds Payable $711.78
Cash $13,000.00
Deferred Bond Issue Costs (3,000/5) $600.00
Dec 31, 2019 Interest Expense (12,202.81 + 600) $12,802.81
Premium on Bonds Payable $797.19
Cash $13,000.00
Deferred Bond Issue Costs (3,000/5) $600.00
Dec 31, 2020 Interest Expense (12,107.13 + 600) $12,707.13
Premium on Bonds Payable $892.87
Cash $13,000.00
Deferred Bond Issue Costs (3,000/5) $600.00
Dec 31, 2020 Bonds Payable $100,000.00
Cash $100,000.00

ekkarill92 answered 1 year ago
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