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On October 1, 2016, Ball Company issued 7% bonds dated October 1, 2016, with a face...

On October 1, 2016, Ball Company issued 7% bonds dated October 1, 2016, with a face amount of $310,000. The bonds mature in 12 years. Interest is paid semiannually on March 31 and September 30. The proceeds from the bond issuance were $320,168.62 to yield 6.60%. Ball Company has a December 31 fiscal year-end and does not use reversing entries.

Required:

1. Prepare journal entries to record the issuance of the bonds and the interest payments for 2016 and 2017 using the effective interest method.
2. Prepare journal entries to record the issuance of the bonds and the interest payments for 2016 and 2017 using the straight-line method.

Please explain solution. Thank you

Solutions

Expert Solution

Given data,

Face Value = $310000

Interest Rate = 7%

Semi annual Interest rate = 7% * 6/12 = 3.5%

Semi annual Interest = $310000 * 3.5% = $10850

Yield rate = 6.6%

Semi annual Yield rate = 6.6% * 6/12 = 3.3%

Issue Value = $320168.62

Premium on issue = Issued Value - Face Value = $320168.62 - $310000 = $10168.62

Requirement 1:

Amortization of premium using effective interest rate method:

Period Opening Balance Interest Expense (3.3%) Interest Payable (3.5%) Amortized Interest Ending Value
1 320168.62 10565.56446 10850 284.43554 319884.2
2 319884.1845 10556.17809 10850 293.8219128 319590.4
3 319590.3625 10546.48196 10850 303.5180359 319286.8
4 319286.8445 10536.46587 10850 313.5341311 318973.3
5 318973.3104 10526.11924 10850 323.8807575 318649.4
6 318649.4296 10515.43118 10850 334.5688225 318314.9
7 318314.8608 10504.39041 10850 345.6095936 317969.3
8 317969.2512 10492.98529 10850 357.0147102 317612.2
9 317612.2365 10481.2038 10850 368.7961956 317243.4
10 317243.4403 10469.03353 10850 380.9664701 316862.5
11 316862.4738 10456.46164 10850 393.5383636 316468.9
12 316468.9355 10443.47487 10850 406.5251296 316062.4
13 316062.4103 10430.05954 10850 419.9404589 315642.5
14 315642.4699 10416.20151 10850 433.798494 315208.7
15 315208.6714 10401.88616 10850 448.1138443 314760.6
16 314760.5575 10387.0984 10850 462.9016012 314297.7
17 314297.6559 10371.82265 10850 478.177354 313819.5
18 313819.4786 10356.04279 10850 493.9572067 313325.5
19 313325.5214 10339.74221 10850 510.2577945 312815.3
20 312815.2636 10322.9037 10850 527.0963017 312288.2
21 312288.1673 10305.50952 10850 544.4904797 311743.7
22 311743.6768 10287.54133 10850 562.4586655 311181.2
23 311181.2181 10268.9802 10850 581.0198015 310600.2
24 310600.1983 10249.80655 10850 600.1934549 310000

Journal Entries:

Date Description Debit Credit
01-Oct-16 Cash a/c Dr 320168.62
   To 7% Bonds Payable 310000
   To Premium on issue of bonds 10168.62
[Being 7% Bonds issued at premium]
31-Mar-17 Interest Expense a/c Dr 10565.56
Premium on issue of bonds 284.44
   To Interest Payable a/c 10850
[Being Interest accrued on Bonds]
31-Mar-17 Interest Payable a/c Dr 10850
   To Cash a/c 10850
[Being Interest paid on bonds]
30-Sep-17 Interest Expense a/c Dr 10556.18
Premium on issue of bonds 293.82
   To Interest Payable a/c 10850
[Being Interest accrued on Bonds]
30-Sep-17 Interest Payable a/c Dr 10850
   To Cash a/c 10850
[Being Interest paid on bonds]

Requirement 2:

Amortization of premium under straight line method = Premium / Period = 10168.62 / 24 = $423.69

Interest Expense = Interest payable - Amortized premium = $10850 - $423.69 = $10426.31

Date Description Debit Credit
01-Oct-16 Cash a/c Dr 320168.62
   To 7% Bonds Payable 310000
   To Premium on issue of bonds 10168.62
[Being 7% Bonds issued at premium]
31-Mar-17 Interest Expense a/c Dr 10426.31
Premium on issue of bonds 423.69
   To Interest Payable a/c 10850
[Being Interest accrued on Bonds]
31-Mar-17 Interest Payable a/c Dr 10850
   To Cash a/c 10850
[Being Interest paid on bonds]
30-Sep-17 Interest Expense a/c Dr 10426.31
Premium on issue of bonds 423.69
   To Interest Payable a/c 10850
[Being Interest accrued on Bonds]
30-Sep-17 Interest Payable a/c                                     Dr 10850
   To Cash a/c 10850
[Being Interest paid on bonds]

ekkarill92 answered 1 year ago
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