Question

On 10/1/2016, Hamilton Corporation issued $1 million of 13.5% bonds for $985,071.68. The bonds are due in 4 years, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%.

Use the spreadsheet found in the link at the bottom to prepare a bond interest expense and discount amortization schedule using the straight-line method.

Use the attached spreadsheet to prepare a bond interest expense and discount amortization schedule using the effective interest method.

Date	Cash Paid	Interest Expense	Discount Amortization	Carrying Amount of Bonds

Prepare any adjusting entries for the end of the fiscal year December 31, 2016, using the:

1.) Straight-line method of amortization

2.) Effective interest method of amortization

Assume the company retired the bonds on June 30, 2017, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the:

1.) Straight-line method of amortization

2.) Effective interest method of amortization

Answer 1

Discount on issue of bond = Face Value - Issue Price = 1,000,000-985,071.68 =$14,928.32

Straight Line Method
Date	Cash Paid	Interest Expense	Discount Amortization	Carrying Amount of Bonds
	(1000,000*13.50%*(6/12)	(Cash Paid+Discount amortization)	(Discount on issue/number of period) = (14928.32/(4*2))	(previous period carrying amount+current period discount amortization)
10/01/2016				985,071.68
03/31/2017	67,500.00	69,366.04	1,866.04	986,937.72
09/30/2017	67,500.00	69,366.04	1,866.04	988,803.76
03/31/2018	67,500.00	69,366.04	1,866.04	990,669.80
09/30/2018	67,500.00	69,366.04	1,866.04	992,535.84
03/31/2019	67,500.00	69,366.04	1,866.04	994,401.88
09/30/2019	67,500.00	69,366.04	1,866.04	996,267.92
03/31/2020	67,500.00	69,366.04	1,866.04	998,133.96
09/30/2020	67,500.00	69,366.04	1,866.04	1,000,000.00

Effective Interest Rate method
Date	Cash Paid	Interest Expense	Discount Amortization	Carrying Amount of Bonds
	(1000,000*13.50%*(6/12)	(carring amount of bond in previous period*coupon rate*(6/12))	(Interest Expense - cash paid)	(previous period carrying amount+current period discount amortization)
10/01/2016				985,071.68
03/31/2017	67,500.00	68,955.02	1,455.02	986,526.70
09/30/2017	67,500.00	69,056.87	1,556.87	988,083.57
03/31/2018	67,500.00	69,165.85	1,665.85	989,749.42
09/30/2018	67,500.00	69,282.46	1,782.46	991,531.88
03/31/2019	67,500.00	69,407.23	1,907.23	993,439.11
09/30/2019	67,500.00	69,540.74	2,040.74	995,479.84
03/31/2020	67,500.00	69,683.59	2,183.59	997,663.43
09/30/2020	67,500.00	69,836.44	2,336.57	1,000,000.00

Journals:

Straight Line Method
Date	Particulars	Dr.	Cr.
30-Jun-17	Interest on Bond	34,683.02
	Cash (1000000*0.135*(3/12))		33,750.00
	Discount on Issue of Bond (1866.04*(3/6))		933.02
30-Jun-17	Bond Payable (986937.72+933.02)	987,870.74
	Loss on retirement of Bonds	4,258.52
	Cash (1000000*98/100)		980,000.00
	Discount on Issue of Bond (14928.32-1866.04-933.02)		12,129.26

Effective Interest Rate method
Date	Particulars	Dr.	Cr.
30-Jun-17	Interest on Bond (986526.7*0.14*(3/12))	34,528.43
	Cash (1000000*0.135*(3/12))		33,750.00
	Discount on Issue of Bond (34,528.43-33,750)		778.43
30-Jun-17	Bond Payable (986526.70+778.43)	987,305.13
	Loss on retirement of Bonds	5,389.74
	Cash (1000000*98/100)		980,000.00
	Discount on Issue of Bond (14928.32-1455.02-778.43)		12,694.87