Question

please help me to solve P11.6

*P11.6 (LO 2,5) Writing On January 1, 2020, Jade SA issued €2,000,000 face value, 7%, 10-year bonds at €2.147,202. This price resulted in a 6% yffective interest rate on the bonds. Jade uses the effective. interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1. Instructions a. Prepare the journal entries to record the following transactions. 1. The issuance of the bonds on January 1, 2020. 2. Accrual of interest and amortization of the premium on December 31, 2020. 3. The payment of interest on January 1, 2021. 4. Accrual of interest and amortization of the premium on December 31, 2021. b. Show the proper non-current liabilities statement of financial position presentation for the bond liability at December 31, 2021. c. Provide the answers to the following questions in narrative form. 1. What amount of interest expense is reported for 2021? 2. Would the bond interest expense reported in 2021 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

Answer 1

Solution € 2,000,000 € 2,147,202 € 147,202 7% Face Value of Bonds Issue price of Bonds Premium on Bonds issue (€ 2,147,202- € 2,000,000) Stated rate of interest Bond yield Bond life Interest payment frequency Total no. of interest payment till maturity 6% 10 Years Annually 10 Annual interest payment = € 2,000,000 x 7% = € 140,000 Date 01/01/20 01/01/21 01/01/22 01/01/23 01/01/24 01/01/25 01/01/26 01/01/27 01/01/28 01/01/29 01/01/30 Bond Premium Amortization table Effective interest method of Amortization Bonds sold to market yield Changes During the Year Ending Bond Liability Balances Cash paid Premium Interest Premium on Carrying Amortized Expense Bonds Payable Value € 147,202 € 2,147,202 € 140,000 € 11,168 € 128,832 € 136,034 € 2,136,034 € 140,000 € 11,838 € 128,162 € 124,196 € 2,124,196 € 140,000 € 12,548 € 127,452 € 111,648 € 2,111,648 € 140,000 € 13,301 € 126,699 € 98,347 € 2,098,347 € 140,000 € 14,0991 € 125,901 € 84,248 € 2,084,248 € 140,000 € 14,945 € 125,055 € 69,303 € 2,069,303 € 140,000 € 15,842 € 124,158 € 53,461 € 2,053,461 € 140,000 € 16,792) € 123,208) € 36,669 € 2,036,669 € 140,000 € 17,800 € 122,200 € 18,869 € 2,018,869 € 140,000 € 18,869 € 121,131 € 0 € 2,000,000 Required a.: Journal entries to record the transactions Credit Date Jan. 1, 2020 General Journal Cash Premium on Bonds Payable Bonds Payable (To record issuance of bonds on 1/1/20) Debit € 2,147,202 € 147,202 I €2,000,000 Credit Date General Journal Debit Dec. 31, 2020 Interest expense € 128,832 Premium on Bonds Payable € 11,168 Interest payable (To record accrual of interest and premium amortization) € 140,000 Date Credit Debit € 140,000 General Journal Interest payable Cash (To record payment of interest on Jan. 01, 2021) € 140,000 Credit Date General Journal Debit Dec. 31, 2021 Interest expense € 128,162 Premium on Bonds Payable € 11,838 Interest payable (To record accrual of interest and premium amortization) € 140,000

Required b.: Balance sheet presentation on Dec. 31, 2021 Jade SA Balance Sheet (Partial) As at December 31, 2021 Non current liabilities: Bonds Payable Add: Premium on Bonds Payable Total non-current liabilities € 2,000,000 € 124,196 € 2,124.196 Required c-1.: Interest expense reported for 2021 € 128,162 Required c-2.: Calculation of Annual interest expense using straight-line method Total interest payment during the entire Bond life (€ 140,000 x 10 Years) Payment of face value on maturity of Bonds Less: Cash proceeds received on issue price of Bond Total Interest expense to be recognised during the entire Bond life € 1,400,000 € 2,000,000 € -2,147,202 € 1,252,798 Annual Interest Expense to be recognised (€ 1,252,798 / 10 years) € 125,280 Interest expense for 2021 under straight line method Interest expense for 2021 under effective interest method € 125,280 € 128,162 The bond interest expense would be greater than the amount that would be reported if the straight- line method of amortization were used.