Question

On January 1, 2020, Spalding Company sold 12% bonds having a maturity value of $1,000,000 for $1,075,815, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2020 and they mature on January 1, 2025, with semiannual interest payable on July 1 and January 1 each year. The company uses the effective-interest method. Instructions:

a) Prepare a complete amortization schedule for these bonds in good form.

b) Prepare the journal entry needed to record the issuance of bonds on January 1, 2020.

c) Prepare the journal entry needed to record the payment accrual of interest on July 1, 2020. Show all calculations.

d) Determine how much interest expense will be on the income statement for the year ended December 31, 2020.

e) Show what will be on the balance sheet related to these transactions as of December 31, 2020. Indicate clearly if any assets or liabilities are current or noncurrent.

Answer 1

First of all understand complete amortization schedule both effective and straight-line methods..Preparing a Bond Amortization Schedule.

A.

• Bond amortization schedule is a table showing periodic interest expense, interest payment and amortization of discount or premium.

Effective of bond amortization

• Following are the steps in preparing a bond amortization schedule prepared under effective rate method of bond amortization:

1. Find the opening carrying amount of the bond payable by discounting the bond's cash flows at the market interest rate (also known as the effective rate of interest);
2. Calculate interest payment for the period by multiplying the par value of the bond with the stated interest rate for the period.
3. Calculate interest expense for the period by multiplying the opening carrying amount with the effective rate of interest for the period;
4. Find the amortization of discount or premium for the period as the difference between the interest expense and the interest payment.
5. Find the closing carrying amount of the bond payable. In case of amortization of discount, add the amortization for the period to the opening carrying amount of the bond. In case of amortization of premium, subtract the amortization for the period from the opening carrying amount of the bond.

Straight-line method of bond amortization

1. Following are the steps in preparing a bond amortization schedule prepared under straight-line method of bond amortization:
2. Find the opening carrying amount of the bond payable (the same as in effective rate of interest method;
3. Find the amortization of discount or premium for the period by dividing the total discount or premium by the number of periods.
4. Calculate interest payment for the period by multiplying the par value of the bond with the stated interest rate for the period.
5. Calculate interest expense for the period. In case of amortization of discount, find the interest expense for the period by adding the amortization to the interest payment. In case of amortization of premium, find the interest expense for the period by subtracting the amortization from the interest payment for the period.;

B.

If investors buy the bonds at a premium, the difference between the face value of the bonds and the amount of cash received is recorded in a premium on bonds payable account. This happens when investors are willing to accept a lower return on their investment, because the stated interest rate is higher than the market interest rate. The entry would be:

Cash / Bank A/C DR..1075815

To premium on bond a/c 75815

To bond payable a/c 1000000

C.

The recorded amount of interest expense is based on the interest rate stated on the face of the bond. Any further impact on interest rates is handled separately through the amortization of any discounts or premiums on bonds payable, as discussed below. The entry for interest payments is a debit to interest expense and a credit to cash.

July 1

Bond Interest Expense – $42418.5

Bond Premium – $7582.5

Cash – $50000

Jan1

Bond Interest Expense – $42418.5

Bond Premium – $7582.5

Cash – $50000

Calculation

1000000*10%*6/12= 50000

50000 - 75815/10 = 42418.5

75815/ 10 (5*2 ) because Primium 5 half yearly interest =7581.5

D.

​​​​​For the year ended 31 Dec 2020

Total bond interest

42418.5*2= 84837

total interest on premium

7581.5*2= 15163

E.

Still non current liabilities because redemption after 4 year date is Jan 1 2025

Note :- in this question I assume that 10% is market value of bond

This question have alternate 12% of bond rate full answer is different

Bond Interest Expense – $52418.5

Bond Premium – $7581.5

Cash – $60000

Calculation

1000000*12%*6/12= 60000

50000 - 75815/10 = 52418.5

75815/ 10 because Primium 5 half yearly interest= 7581.5

D.

​​​​​For the year ended 31 Dec 2020

Total bond interest

52418.5*2= 104835

total interest on premium

7581.5*2= 15163