Question

On June 30, 2020, Carla Company issued $5,640,000 face value of 14%, 20-year bonds at $6,488,600, a yield of 12%. Carla uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(1)		The issuance of the bonds on June 30, 2020.
(2)		The payment of interest and the amortization of the premium on December 31, 2020.
(3)		The payment of interest and the amortization of the premium on June 30, 2021.
(4)		The payment of interest and the amortization of the premium on December 31, 2021.

No.	Date	Account Titles and Explanation	Debit	Credit
(1)	June 30, 2020
(2)	December 31, 2020
(3)	June 30, 2021
(4)	December 31, 2021

  

  

Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2021, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.)

Carla Company Balance Sheet
?
?				$
?				$
?				$

  

  

Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2021? (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense reported for 2021

$

(2) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.)

Total cost of borrowing over the life of the bond

$

Answer 1

Journal Entries
Date	Particulars			Debit	Credit
30-Jun-20	Cash			$ 6,488,600.00
	To Premium on Bonds Payable				$     848,600.00
	To Bonds Payable				$ 5,640,000.00
31-Dec-20	Interest Expense			$          389,316
	Premium on Bonds Payable			$               5,484
	Cash				$          394,800
30-Jun-21	Interest Expense			$          388,987
	Premium on Bonds Payable			$               5,813
	Cash				$          394,800
31-Dec-21	Interest Expense			$          388,638
	Premium on Bonds Payable			$               6,162
	To Cash				$          394,800

Workings:

Bond Premium Amortized			=	P x R – N x Y
where,		P	=	Bond issue price,
		R	=	Market Rate of interest,
		N	=	Nominal or face value and,
		Y	=	coupon rate of interest/ Yield
		31-Dec-20
		P	=	$         6,488,600
		R	=	6%	$      389,316
		N	=	$         5,640,000
		Y	=	7%	$      394,800
			Premium Amortized		$           5,484
		30-Jun-21
		P	=	$         6,483,116		($ 6488600 - $ 5484)
		R	=	6%	$      388,987
		N	=	$         5,640,000
		Y	=	7%	$      394,800
			Premium Amortized		$           5,813
		31-Dec-21
		P	=	$         6,477,303		($ 6483116 - $ 5813)
		R	=	6%	$      388,638
		N	=	$         5,640,000
		Y	=	7%	$      394,800
			Premium Amortized		$           6,162

Balance Sheet (Partial)
Long- Term Liabilities:
Bonds Payable				$     5,640,000.00
Add: Premium on Bonds Payable				$              831,141
Book value of bonds payable				$           4,808,859

1)	Interest Expense for 2021			$              789,600

2)	Total cost of borrowing is the difference between the
	cash paid out over the life of a bond and the cash received
	when the bond is issued.
	Principal at Maturity			$     5,640,000.00
Add:	Semiannual interest payments			$   15,792,000.00
	Cash to be paid to bondholders			$   21,432,000.00
Less:	Cash received from bondholders			$     6,488,600.00
	Total cost of borrowing			$   14,943,400.00

Is this correct?