Question

Problem 14-05

In each of the following independent cases, the company closes its books on December 31.

Metlock Co. sells $534,000 of 8% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021.

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.

Schedule of Bond Discount Amortization
Effective-Interest Method
Bonds Sold to Yield

date	cash paid	interest expense	discount amortized	carrying amount of bonds
3/1/20
9/1/20
3/1/21
9/1/21
3/1/22
9/1/22
3/1/23
9/1/23

Prepare all of the relevant journal entries from the time of sale until December 31, 2021. (Assume that no reversing entries were made.)

3/1/20

cash

discount on bonds payable

bonds payable

9/1/20

interest expense

discounts on bonds payable

cash

12/31/20

interest expense

interest payable

discount on bonds payable

3/1/21

interest payable

interest expense

cash

discounts on bonds payable

9/1/21

interest expense

cash

discounts on bonds payable

12/31/21

interest expense

interest payable

discounts on bonds payable

Answer 1

Issue price of the bond=Present value of interest payment+Present value of maturity value at repayment
Interest expense=Maturity value*Coupon rate*period=534000*8%*6/12=$ 21360
Number of semi-annual periods=7
Discount rate=Yield per semi-annual period=12*6/12=6%
Present value of interest payment=Present value of $ 21360 at 6% for 7 years=21360*5.58238=$ 119240
Present value of maturity value at repayment=Present value of $534000 at 6% for 7th year=534000*0.66506=$ 355142
Issue price of the bond=119240+355142=$ 474382
Discount on issue=Face value-issue price=534000-474382=$ 59618
	Schedule of bond discount amortization
Date	Cash paid	Interest expense	Discount amortized	Carrying amount of bonds
3/1/20.				474382
9/1/20.	21360	28463	7103	481485
3/1/21.	21360	28889	7529	489014
9/1/21.	21360	29341	7981	496995
3/1/22.	21360	29820	8460	505455
9/1/22.	21360	30327	8967	514422
3/1/23.	21360	30865	9505	523927
9/1/23.	21360	31433	10073	534000
Cash paid=534000*8%*6/12=$ 21360
Interest expense=Beginning carrying value*6%
Discount amortized=Interest expense-Cash paid
Carrying amount of bonds=Beg. Carrying amount+Discount amortized
Journal entries:
Date	Account titles and explanation					Debit	Credit
3/1/20.	Cash					474382
	Discount on bonds payable					59618
	Bonds payable						534000
	(Issue of bonds at discount)
9/1/20.	Interest expense					28463
	Discount on bonds payable						7103
	Cash						21360
	(Interest on bonds paid)
12/31/20.	Interest expense			(28889*4/6)		19259
	Interest payable						19259
	(Interest accrued for 4 months)
3/1/21.	Interest expense			(28889*2/6)		9630
	Interest payable					19259
	Discount on bonds payable						7529
	Cash						21360
	(Interest on bonds paid)
9/1/21.	Interest expense					29341
	Discount on bonds payable						7981
	Cash						21360
	(Interest on bonds paid)
12/31/21.	Interest expense			(29820*4/6)		19880
	Interest payable						19880
	(Interest accrued for 4 months)