Question

In: Accounting

On December 31, 2016, Fett Corporation issued $980,000, 8%, 10-year bonds for $1,125,824 cash when the...

On December 31, 2016, Fett Corporation issued $980,000, 8%, 10-year bonds for $1,125,824 cash when the market rate of interest was 6%. The bonds pay interest semi-annually each June 30 and December 31. Fett uses the effective interest amortization method to amortize any premium or discount.

A. Give the set up of the basic bond information. Face Value Stated Rate of Interest Annual Stated Interest Periodic Stated Interest Bond Price (given) Premium or Discount (circle one)

B. Give the general journal entry to record the issue of the bonds on December 31, 2106.

C. Prepare an effective interest amortization table for the first four interest payment date (through December 31, 2018):

Periodic Carrying Stated Effective Value Date Interest Interest Amortization of Bond

D. Give the general journal entries necessary for the first interest payment date, June 30, 2017.

E. Answer the following questions:

1. What amount of interest expense will be reported by Vader on the 2017 income statement?

2. What amount of interest expense will be reported by Vader on the 2018 income statement?

3. What is the total interest expense over the life of the bond?

4. If the straight-line method of amortization had been used, what would be the total interest expense over the life of the bond?

F. Show the balance sheet presentation of the bond liability on December 31, 2018:

Solutions

Expert Solution

A:
Bond face value $980,000
rate of interest = 8%
Annual stated interest =8%
Stated interest = 6%
Bond price 1125824
Premium on Bond issued $145,824
B:
Debit Cash 1125824
Credit Bond Payable $980,000
Credit Premium on Bond issued $145,824
C:
Period Cash interest Interest expense Premium amortised Carrying Value$
31-Dec-16 1125824
30-Jun-17 39200 33775 5425 1120399
31-Dec-17 39200 33612 5588 1114811
30-Jun-18 39200 33444 5756 1109055
31-Dec-18 39200 33272 5928 1103127
D:
Debit Interest Expense 33775
Debit Premium on Bond issued 5425
Credit Cash 39200
E:
1)interest expense will be reported by Vader on the 2017 income statement = 67387
2)interest expense will be reported by Vader on the 2018 income statement = 66716
3) the total interest expense over the life of the bond = 39200*20-145824 638176
4)total interest expense over the life of the bond if straight line amortization= 638176
5) Balance sheet presentation as on 31 dec 2018:
Liabilities:
Bonds payable $980,000
Premium on Bond issued $123,127(ie.103127-980000)

Related Solutions

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...
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...
On December 31, 2018, when the market interest rate is 8%, Arnold Corporation issues $200,000 of 6%, 10-year bonds payable
On December 31, 2018, when the market interest rate is 8%, Arnold Corporation issues $200,000 of 6%, 10-year bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds at issuance.
On January 2, 2016, Prebish corporation issued $1,500,000 of 10% bonds to yield 11% due December...
On January 2, 2016, Prebish corporation issued $1,500,000 of 10% bonds to yield 11% due December 31, 2025. Interest on the bonds is payable annually each December 31. The bonds are callable at 101 ( at 101% of face amount), and on January 2, 2019, Prebish called $1,000,000 face amount of the bonds and retired them A. Determine the price of the Prebish bonds when issued on Janurary 2, 2016? B. Prepare an amortization schedule for 2016-2020 for the bonds?...
On December​ 31, 2016​, when the market interest rate is 10​%, ArnoldArnold Corporation issues $$280,000 of...
On December​ 31, 2016​, when the market interest rate is 10​%, ArnoldArnold Corporation issues $$280,000 of 9​%, 8​-year bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds at issuance
On January 2, 2015, L Corporation issued $2,050,000 of 10% bonds at 96 due December 31,...
On January 2, 2015, L Corporation issued $2,050,000 of 10% bonds at 96 due December 31, 2024. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”) The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2020, L Corp. called $1,230,000 face amount of...
On January 2, 2015, Concord Corporation issued $1,300,000 of 10% bonds at 98 due December 31,...
On January 2, 2015, Concord Corporation issued $1,300,000 of 10% bonds at 98 due December 31, 2024. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”) The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2020, Concord called $780,000 face amount of the...
On January 2, 2012, Marin Corporation issued $1,050,000 of 10% bonds at 97 due December 31,...
On January 2, 2012, Marin Corporation issued $1,050,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method”.) The bonds are callable at 102 (i.e., at 102% of face amount), and on January 2, 2017, Marin called $630,000 face amount of the...
Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The...
Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. Sparks Company decided to redeem the bonds on January 1, 2018. What amount of gain or loss would Sparks report on their 2018 income statement? $27,600 gain $15,600 gain $15,600 loss $27,600 loss
Blossom Company issued $466,500, 7%, 15-year bonds on December 31, 2016, for $447,840. Interest is payable...
Blossom Company issued $466,500, 7%, 15-year bonds on December 31, 2016, for $447,840. Interest is payable annually on December 31. Blossom uses the straight-line method to amortize bond premium or discount. Prepare the journal entries to record the following events. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a) The issuance of the bonds. (b) The payment of interest and the discount amortization on December 31, 2017. (c) The redemption of the bonds at...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT