Question

Bonita Co. sells $425,000 of 12% bonds on June 1, 2020. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2024. The bonds yield 8%. On October 1, 2021, Bonita buys back $136,000 worth of bonds for $142,000 (includes accrued interest). Give entries through December 1, 2022.

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.

date	cash paid	interest expense	premium amortized	carrying amount of bonds
6/1/20
12/1/20
6/1/21
12/1/21
6/1/22
12/1/22
6/1/23
12/1/23
6/1/24

Prepare all of the relevant journal entries from the time of sale until December 31, 2022.

6/1/20

cash

premium on bonds payable

bonds payable

12/1/20

interest expense

premium on bonds payable

interest payable

12/31/20

interest expense

premium on bonds payable

interest payable

6/1/21

interest expense

interest payable

premium on bonds payable

cash

10/1/21

bonds payable

premium on bonds payable

gain on redemption of bonds

cash

12/1/21

interest expense

premium on bonds payable

cash

12/31/21

interest expense

premium on bonds payable

interest payable

6/1/22

interest expense

interest payable

premium on bonds payable

cash

12/1/22

interest expense

premium on bonds payable

cash

Answer 1

Bonita Co. Bond amortization schedule Using the effective-interest method Date Cash paid Interest Premium 6/1/20 12/1/20 $25,500 $19,289 $6,211 6/1/21 $25,500 $19,041 $6,459 12/1/21 $25,500 $18,782 $6,718 6/1/22 $25,500 $18,514 $6,986 12/1/22 $25,500 $18,234 $7,266 6/1/23 $25,500 $17,944 $7,556 12/1/23 $25,500 $17,641 $7,859 6/1/24 $25,500 $17,327 $8,173 Carrying $482,228 [Ref: Workings] $476,017 [Interest = $482228 x 8% / 2 = $19289; Prem. Amortized = $25500 - $19289 = $6211; Carry. Value = $482228 - $6211 = $476017] $469,558 [Interest = $476017 x 8% / 2 = $19041; Prem. Amortized = $25500 - $19041 = $6459; Carry. Value = $476017 - $6459 = $469558] $462,840 [Interest = $469558 x 8% / 2 = $18782; Prem. Amortized = $25500 - $18782 = $6718; Carry. Value = $469558 - $6718 = $462840] $455,854 [Interest = $462840 x 8% / 2 = $18514; Prem. Amortized = $25500 - $18514 = $6986; Carry. Value = $462840 - $6986 = $455854] $455,854 $448,588 [Interest = $455854 x 8% / 2 = $18234; Prem. Amortized = $25500 - $18234 = $7266; Carry. Value = $455854 - $7266 = $448588] $441,032 [Interest = $448588 x 8% / 2 = $17944; Prem. Amortized = $25500 - $17944 = $7556; Carry. Value = $448588 - $7556 = $441032] $433,173 [Interest = $441032 x 8% / 2 = $17641; Prem. Amortized = $25500 - $17641 = $7859; Carry. Value = $441032 - $7859 = $433173] $425,000 [Interest = $433173 x 8% / 2 = $17327; Prem. Amortized = $25500 - $17327 = $8173; Carry. Value = $433173 - $8173 = $425000]

Workings: Present value of a future lumpsum receipt = Future lumpsum receipt / (1 + Discount rate) $425,000 4% Future lumpsum receipt at maturity Discount rate (=Semiannual yield rate) Number of periods Present value of a future lumpsum receipt [8%/2] [4 years x 2] $310,543 [$425000 / (1+4%)^8] care se la vesoot 21247368 [1 – (1 + r)- P1 L7 where, 4% P= Periodic Payment $25,500 [$425000 x 12% / 2] r=rate per period [8%/2] n = number of periods [4 years x 2] Present value of future semiannual coupon receipts $171,685 ($25500 x (1 - (1 + 4%)^-8)) / 4% = $25500 x (1 - 1.044-8) / 4% = $171685] Bond's current market price $482,228 ($310543 + $171685)

Credit Debit $482,228 $425,000 $57,228 --> $482228 - $425000 $19,289 $6,211 $25,500 --> $425000 x 12% / 2 Date Account Title and Explanation 6/1/20 Cash Bonds Payable Premium on Bonds Payable 12/1/20 Interest Expense Premium on Bonds Payable Cash 6/1/21 Interest Expense Premium on Bonds Payable Cash 12/1/21 Interest Expense Premium on Bonds Payable Cash 6/1/22 Interest Expense Premium on Bonds Payable Cash 12/1/22 Interest Expense Premium on Bonds Payable $19,041 $6,459 $25,500 $18,782 $6,718 $25,500 $18,514 $6,986 $25,500 $18,234 $7,266 $25,500