Question

* Problem 14-05 In each of the following independent cases, the company closes its books on December 31. Pharoah Co, sells $494,000 of 10% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021. Prepare a bond amortization schedule using the effective interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to O decimal places, e.g. 38,548.) Schedule of Bond Discount Amortization Effective-Interest Method Bonds Sold to Yield Cash Paid Interest Expense Discount Amortized Carrying Amount of Bonds Date 3/1/20$[ 9/1/20 3/1/21 9/1/21 3/1/22 9/1/22 3/1/23 9/1/23

Answer 1

Part 1

Schedule of Bond Premium Amortization

Effective Interest Method

Bonds Sold to Yield (10% Bonds Sold to Yield 12%)

Date	Cash paid	Interest expense	Discount amortized	Carrying amount of bonds
3/1/20				466425
9/1/20	24700	27986	3286	469711
3/1/21	24700	28183	3483	473194
9/1/21	24700	28392	3692	476885
3/1/22	24700	28613	3913	480798
9/1/22	24700	28848	4148	484946
3/1/23	24700	29097	4397	489343
9/1/23	24700	29357	4657	494000

Issue price = present value of interest payment + present value of principal = (494000*10%/2*5.58238)+(494000*0.66506) = 137885+328540 = $466425

Present value of annuity factor for $1 @ i=6%, n = 7 is 5.58238

Present value factor for $1 @ i=6%, n = 7 is 0.66506

Discount = maturity value – issue price = 494000-466425 = $27575

Cash paid = 494000*10%/2 = 24700

Interest expense = previous carrying amount * 12%/2

Discount amortized = Interest expense -Cash paid

Carrying amount of bonds = previous carrying amount + discount amortized

Date	General Journal	Debit	Credit
3/1/20	Cash	466425
	Discount on Bonds Payable	27575
	Bonds Payable		494000
9/1/20	Interest Expense	27986
	Discount on Bonds Payable		3286
	Cash		24700
12/31/20	Interest Expense	18789
	Discount on Bonds Payable (3483*4/6)		2322
	Interest Payable (24700*4/6)		16467
3/1/21	Interest Expense	9394
	Interest Payable	16467
	Discount on Bonds Payable (3483*2/6)		1161
	Cash		24700
9/1/21	Interest Expense	28392
	Discount on Bonds Payable		3692
	Cash		24700
12/31/21	Interest Expense	19076
	Discount on Bonds Payable (3913*4/6)		2609
	Interest Payable (24700*4/6)		16467

Part 2

Schedule of Bond Premium Amortization

Effective Interest Method

Bonds Sold to Yield (12% Bonds Sold to Yield 10%)

Date	Cash paid	Interest expense	Premium amortized	Carrying amount of bonds
6/1/20				440758
12/1/20	24840	22038	2802	437956
6/1/21	24840	21898	2942	435014
12/1/21	24840	21751	3089	431925
6/1/22	24840	21596	3244	428681
12/1/22	24840	21434	3406	425275
6/1/23	24840	21264	3576	421699
12/1/23	24840	21085	3755	417944
6/1/24	24840	20896	3944	414000

Issue price = present value of interest payment + present value of principal = (414000*12%/2*6.46321)+(414000*0.67684) = 160546+280212 = $440758

Present value of annuity factor for $1 @ i=5%, n = 8 is 6.46321

Present value factor for $1 @ i=5%, n = 8 is 0.67684

Premium = issue price – maturity value = 440758-414000 = $26758

Cash paid = 365000*12%/2 = 21900

Interest expense = previous carrying amount * 10%/2

Premium amortized = Cash paid- Interest expense

Carrying amount of bonds = previous carrying amount – premium amortized

Date	General journal	Debit	Credit
6/1/17	Cash	440758
	Premium on Bonds Payable		26758
	Bonds Payable		414000
12/1/17	Interest Expense	22038
	Premium on Bonds Payable	2802
	Cash		24840
12/31/17	Interest Expense (21898/6)	3650
	Premium on Bonds Payable (2942/6)	490
	Interest payable (24840/6)		4140
6/1/18	Interest Expense (21898/*5/6)	18248
	Interest payable	4140
	Premium on Bonds Payable (2942*5/6)	2452
	Cash		24840
10/1/18	Interest Expense (21751*0.33*4/6)	4785
	Premium on Bonds Payable (3089*0.33*4/6)	680
	Cash (24840*0.33*4/6)		5465
	(to record interest expense and premium amortized)
10/1/18	Bonds Payable	136620
	Premium on Bonds Payable	6255
	Gain on Redemption of Bonds		4720
	Cash		138155
	(to record buy back of bonds)
12/1/18	Interest Expense (21751*0.67)	14573
	Premium on Bonds Payable (3089*0.67)	2070
	Cash (24840*0.67)		16643
12/31/18	Interest Expense (21596*0.67*1/6)	2412
	Premium on Bonds Payable (3244*0.67*1/6)	362
	Interest payable (24840*0.67*1/6)		2774
6/1/19	Interest Expense (21596*0.67*5/6)	12058
	Interest payable	2774
	Premium on Bonds Payable (3244*0.67*5/6)	1811
	Cash (24840*0.67)		16643
12/1/19	Interest Expense (21434*0.67)	14361
	Premium on Bonds Payable (3406*0.67)	2282
	Cash (24840*0.67)		16643

136620/414000 = 0.33

(1-0.33) = 0.67

Net carrying amount of bonds redeemed - Par value	136620
Unamortized premium ((0.33*(26758-2802-490-2452))-680)	6255
	142875
Reacquisition price (143620-(136620*12%*4/12))	(138155)
Gain on redemption	4720