Question

Part 1

As the controller of Lynbrook, Inc., you were asked to evaluate a potential bond issuance to raise funds to expend the company’s operations. Lynbrook is considering issuing a $10 million 5- year, 12 percent bonds payable on June 30, 2020. Interest would be payable semiannually on December 31 and June 30. Bond discounts and premiums would be amortized at each interest payment date using the straight-line method. The company's fiscal year ends at December 31.

Requirement:

a. Prepare an amortization table for each of the 10 semiannual periods, under each of the following assumptions:

1. The bonds were issued at 98. (round to the nearest dollar.) 2. The bonds were issued at 101. (round to the nearest dollar.)

2. Prepare the journal entry to record the issuance of the bonds on June 30, 2020 if Lynbrook issues the bonds at 98.

3. Prepare the journal entries necessary to record the semiannual bond interest payments on December 31, 2020 and June 30, 2021, if the bonds were issued at 101.

Part 2

The long-range strategic budgeting process also called for Lynbrook to borrow $2,000,000 cash on January 1, 2020 from Wells Fargo by signing a ten-year 6% installment note. The note requires equal payments of principal and interest on December 31 each year in the amount of $271,736.

Required

1. Prepare the journal entries required by Lynbrook on the following dates: a) December 31, 2020

b) December31,2021
2. Determine the total interest expense Lynbrook will recognize over the life of the note.

Answer 1

Part 1:
Amortization table
Issued at 98
Issue price=1000000*98%=$ 980000
Discount on issue=1000000-980000=$ 20000
Discount to be amortized per semi-annual period=20000/10=$ 2000
Date	Interest paid	Discount amortized	Interest expense	Carrying value
June 30,2020				980000
Dec 31,2020	120000	2000	122000	982000
June 30,2021	120000	2000	122000	984000
Dec 31,2021	120000	2000	122000	986000
June 30,2022	120000	2000	122000	988000
Dec 31,2022	120000	2000	122000	990000
June 30,2023	120000	2000	122000	992000
Dec 31,2023	120000	2000	122000	994000
June 30,2024	120000	2000	122000	996000
Dec 31,2024	120000	2000	122000	998000
June 30,2025	120000	2000	122000	1000000
Interest paid=1000000*12%=$ 120000
Interest expense=Interest paid+Discount amortized
Carrying value=Beginning balance+Discount amortized
Amortization table
Issued at 101
Issue price=1000000*101%=$ 1010000
Premium on issue=1010000-1000000=$ 10000
Premium to be amortized per semi-annual period=10000/10=$ 1000
Date	Interest paid	Premium amortized	Interest expense	Carrying value
June 30,2020				1010000
Dec 31,2020	120000	1000	119000	1009000
June 30,2021	120000	1000	119000	1008000
Dec 31,2021	120000	1000	119000	1007000
June 30,2022	120000	1000	119000	1006000
Dec 31,2022	120000	1000	119000	1005000
June 30,2023	120000	1000	119000	1004000
Dec 31,2023	120000	1000	119000	1003000
June 30,2024	120000	1000	119000	1002000
Dec 31,2024	120000	1000	119000	1001000
June 30,2025	120000	1000	119000	1000000
Interest paid=1000000*12%=$ 120000
Interest expense=Interest paid-Premium amortized
Carrying value=Beginning balance-Premium amortized