Question

In: Accounting

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
Next > < Previous

Related Solutions

On October 1, 2016, Ball Company issued 10% bonds dated October 1, 2016, with a face...
On October 1, 2016, Ball Company issued 10% bonds dated October 1, 2016, with a face amount of $350,000. The bonds mature in 8 years. Interest is paid semiannually on March 31 and September 30. The proceeds from the bond issuance were $355,751.07 to yield 9.70%. 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...
On October 1, 2016, Ball Company issued 10% bonds dated October 1, 2016, with a face...
On October 1, 2016, Ball Company issued 10% bonds dated October 1, 2016, with a face amount of $350,000. The bonds mature in 8 years. Interest is paid semiannually on March 31 and September 30. The proceeds from the bond issuance were $355,751.07 to yield 9.70%. 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...
On October 1, 2016, Ball Company issued 6% bonds dated October 1, 2016, with a face...
On October 1, 2016, Ball Company issued 6% bonds dated October 1, 2016, with a face amount of $210,000. The bonds mature in 9 years. Interest is paid semiannually on March 31 and September 30. The proceeds from the bond issuance were $218,888.62 to yield 5.40%. 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...
The Bradford Company issued 12% bonds dated January 1, 2016, with a face amount of $20,000,000...
The Bradford Company issued 12% bonds dated January 1, 2016, with a face amount of $20,000,000 on January 1, 2016. The bonds mature on December 31, 2025 (10 years). For bonds of similar risk and maturity the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1) Required: A. Determine the price of the bonds at January 1, 2016. B. Prepare the journal entry...
On February 1, 2016, Baker Company issued 9% bonds, dated February 1, with a face amount...
On February 1, 2016, Baker Company issued 9% bonds, dated February 1, with a face amount of $ 80 million. The bonds mature on January 31, 2020 ( 4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. The Fiscal years of both firms end December 31 Crimley Motor Products Bond Issue: $80,000,000 Bond Issue years: 4 years Bond Issue interest rate: 9% Market Annual Yield:...
On October 1, 2016, Indigo Corp. issued $960,000, 5%, 10-year bonds at face value. The bonds...
On October 1, 2016, Indigo Corp. issued $960,000, 5%, 10-year bonds at face value. The bonds were dated October 1, 2016, and pay interest annually on October 1. Financial statements are prepared annually on December 31. Prepare the journal entry to record the issuance of the bonds. Prepare the adjusting entry to record the accrual of interest on December 31, 2016. Show the balance sheet presentation of bonds payable and bond interest payable on December 31, 2016. Prepare the journal...
On February 1, 2021, Cromley Motor Products issued 7% bonds, dated February 1, with a face...
On February 1, 2021, Cromley Motor Products issued 7% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 8%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (FV of $1, PV of $1, FVA of $1,...
On February 1, 2018, Fox Corporation issued 7% bonds dated February 1, 2018, with a face...
On February 1, 2018, Fox Corporation issued 7% bonds dated February 1, 2018, with a face amount of $120,000. The bonds sold for $108,125 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Fox's fiscal year is the calendar year. Fox uses the straight-line method of amortization. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2018. 2. Prepare the...
On February 1, 2021, Cromley Motor Products issued 7% bonds, dated February 1, with a face...
On February 1, 2021, Cromley Motor Products issued 7% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 8%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (FV of $1, PV of $1, FVA of $1,...
On February 1, 2018, Cromley Motor Products issued 7% bonds, dated February 1, with a face...
On February 1, 2018, Cromley Motor Products issued 7% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 8%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (FV of $1, PV of $1, FVA of $1,...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT