Question

On January 1, 2016, Gates Corporation issued $100,000 of 5-year bonds due December 31, 2020, for $103,604.79 minus debt issuance costs of $3,000. The bonds carry a stated rate of interest of 13% payable annually on December 31 and were issued to yield 12%. The company uses the effective interest method of amortization to amortize any discounts or premiums and the straight-line method to amortize the debt issuance costs.

Required:

Prepare the journal entries to record the issuance of the bonds, all the interest payments, premium amortizations, debt issuance cost amortizations, and the repayment of the bonds.

1. Prepare the journal entries to record the issuance of the bonds, all the interest payments, premium amortizations, debt issuance cost amortizations, and the repayment of the bonds.

Additional Information:

2016 has 10 general journal lines

2017, 2018, 2019 has 5 general journal lines

2020 has 7 general journal lines

2. Prepare a bond interest expense and premium amortization schedule for the bonds. Additional Instructions

GATES CORPORATION

Bond Interest Expense and Premium Amortization Schedule

Effective Interest Method 13% Bonds Sold to Yield 12%

1	Date	Cash Credit	Interest Expense Debit	Unamortized Premium Debit	Book Value of Bonds
2	01/01/16
3	12/31/16
4	12/31/17
5	12/31/18
6	12/31/19
7	12/31/20

Answer 1

Maturity Value of Bonds Payable		$     100,000.00
Proceeds from Sale of Bonds		$     103,604.79
Premium on Bonds Payable		$         3,604.79

1.

1/1/2016	Cash		103,604.79
	Premium on Bonds Payable			3,604.79
	Bonds Payable			100,000.00
31/12/2016	Bond Interest Expense		12,432.57
	Premium on Bonds Payable		567.43
	Cash			13,000.00
31/12/2017	Bond Interest Expense		12,364.48
	Premium on Bonds Payable		635.52
	Cash			13,000.00
31/12/2018	Bond Interest Expense		12,288.22
	Premium on Bonds Payable		711.78
	Cash			13,000.00
31/12/2019	Bond Interest Expense		12,202.81
	Premium on Bonds Payable		797.19	13,000.00
	Cash
31/12/2020	Bond Interest Expense		12,107.15
	Premium on Bonds Payable		892.85
	Cash			13,000.00

2.

Amortization Schedule
Date	Cash Paid	Interest	Premium	Carrying Amount
	(100000*13%)	Expense	Amortized	of Bonds
01/01/2016				$      103,604.79
31/12/2016	$     13,000.00	$       12,432.57	$     567.43	$      103,037.36
31/12/2017	$     13,000.00	$       12,364.48	$     635.52	$      102,401.85
31/12/2018	$     13,000.00	$       12,288.22	$     711.78	$      101,690.07
31/12/2019	$     13,000.00	$       12,202.81	$     797.19	$      100,892.88
31/12/2020	$     13,000.00	$       12,107.15	$     892.85	$      100,000.02