Question

Sage Co. sells $ 403,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Sage buys back $ 132,990 worth of bonds for $ 138,990 (includes accrued interest).

-Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end

-Prepare all of the relevant journal entries from the time of sale until the date indicated. Give entries through December 1, 2019. (Assume that no reversing entries were made.)

Answer 1

Calculation of Present Value of Bond:

Helf Year ending on	Particular	Cash Outflow	PVIF	PV of Cash Outflows
Dec-17	Interest	24,180	0.952380952	23,028.57
Jun-18	Interest	24,180	0.907029478	21,931.97
Dec-18	Interest	24,180	0.863837599	20,887.59
Jun-19	Interest	24,180	0.822702475	19,892.95
Dec-19	Interest	24,180	0.783526166	18,945.66
Jun-20	Interest	24,180	0.746215397	18,043.49
Dec-20	Interest	24,180	0.71068133	17,184.27
Jun-21	Interest & Principal	4,27,180	0.676839362	2,89,132.24
Total				4,29,046.75

Bond Amortisation Schedule:

Helf Year ending on	Opening	Interest expense	Payment done	Closing	Bond Amortisation (Premium)
Dec-17	4,29,046.75	21,452.34	24,180.00	4,26,319.08	2,727.66
Jun-18	4,26,319.08	21,315.95	24,180.00	4,23,455.04	2,864.05
Dec-18	4,23,455.04	21,172.75	24,180.00	4,20,447.79	3,007.25
Jun-19	4,20,447.79	21,022.39	24,180.00	4,17,290.18	3,157.61
Dec-19	4,17,290.18	20,864.51	24,180.00	4,13,974.69	3,315.49
Jun-20	4,13,974.69	20,698.73	24,180.00	4,10,493.42	3,481.27
Dec-20	4,10,493.42	20,524.67	24,180.00	4,06,838.10	3,655.33
Jun-21	4,06,838.10	20,341.90	4,27,180.00	-	3,839.00
					26,047.65

Journal Entries:

Issuance of Bond:

01-07-2017	Cash/Bank	Dr	4,29,046.75
	Bonds Payable	Cr		4,03,000.00
	Premium on Bonds Payable	Cr		26,046.75

Interest entry:

01-12-2017	Interest Expense	Dr	21,452.34
	Premium on Bonds Payable	Dr	2,727.66
	Cash	Cr		24,180.00
01-07-2018	Interest Expense	Dr	21,315.95
	Premium on Bonds Payable	Dr	2,864.05
	Cash	Cr		24,180.00