Question

In each of the following independent cases, the company closes its books on December 31 Cheyenne Co. sells $495,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1, The due date of the bonds is September 1, 2020, The bonds yield 12%. 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 0 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 Prepare all of the relevant journal entries from the time of sale until the date indicated. (Assume that no reversing entries were made.) (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. 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.)

Answer 1

Calculation of issue price of bonds
Issue price of bonds = Present value of Bond par value + Present value of semi annual interest payments
Step 1 - Calculation of present value of bond par value
Present value of bond maturity sum = Bond Par value * Discount factor of 7th Semi annual period using 6% semi annual bond yield
Present value of bond maturity sum = $495000 * (1+0.06)^-7
Present value of bond maturity sum = $329,203.27
Step 2 - Calculation of Present value of semi annual bond interest payments
Present value of annuity = P*{[1 - (1+r)^-n]/r}
Present value of annuity = Present value of semi annual bond interest payments = ?
P = semi annual interest payment = $495000 * 10%/2 = $24750
r = semi annual bond yield = 6%
n = number of semi annual payments = 7
Present value of annuity = 24750*{[1 - (1+0.06)^-7]/0.06}
Present value of semi annual bond interest payments = $138163.94
Issue price of bonds = $329203.27 + $138163.94 = $4,67,367
Schedule of bond discount amortization
Effective Interest method
Bond sold to Yield
Date	Cash paid (5% of $495000)	Interest Expense [6% of beginning Carrying amount of bonds)	Discount amortized	Carrying amount of bonds
A	B	C	C-D	E
01/03/2017				$467,367
01/09/2017	$24,750	$28,042	$3,292	$470,659
01/03/2018	$24,750	$28,240	$3,490	$474,149
01/09/2018	$24,750	$28,449	$3,699	$477,847
01/03/2019	$24,750	$28,671	$3,921	$481,768
01/09/2019	$24,750	$28,906	$4,156	$485,924
01/03/2020	$24,750	$29,155	$4,405	$490,330
01/09/2020	$24,750	$29,420	$4,670	$495,000
Journal entries
Date	Account Titles			Debit	Credit
01/03/2017	Cash			$467,367
	Discount on Bonds Payable			$27,633
	Bonds Payable				$495,000
01/09/2017	Interest Expense			$28,042
	Discount on Bonds Payable				$3,292
	Cash				$24,750
01/03/2018	Interest Expense			$9,413
	Interest Payable			$18,826
	Discount on Bonds Payable				$3,490
	Cash				$24,750
01/09/2020	Bonds Payable			$495,000
	Cash				$495,000