Question

P14.5 (LO 1, 2 ) Excel (Comprehensive Bond Problem) In each of the following independent cases, the company closes its books on December 31. 1. Sanford Co. sells $500,000 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. 2. Titania Co. sells $400,000 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 10%. On October 1, 2021, Titania buys back $120,000 worth of bonds for $126,000 (includes accrued interest). Give entries through December 1, 2022. Instructions For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Answer 1

QUESTION 1 : SANFORD CO.

PV = Present Value FV = Future Value r=Rate n = Number of periods PMT = Semi-Annual Payment Present Value (PV) = Future Value (FV)(1+r)^n + PMT (1-(1+r)^-n/r) Interest per semi annual period = 500,000 x 10%/2 = 25,000 or alternatively we could use simple method for calculating bond discount or premium using present value table $ 500,000 0.66506 332,530 139,560 $ $ maturity value of bond payable Present value of $1 [ 7 periods, 6% ] present value of bond Present value of interest payable semi annually PV of annuity 25,000 ( 7 periods, 6% ] 25,000 x 5.58238 Total proceeds from bond [ 332,530 + 139,560 ] Discount on bond payable $ 472,090 27,910

Amortization table for sanford co. using effective interest method. Semiannual Semiannual Carrying Carrying Value Amortization Unamortized Semiannual Interest Expense Interest Value at at beginning of of Bond Bond Discount Interest Period at 12% to payment to end of period Discount berecorded bondholders at end of Period period 6% of A 5.% of 500,000 (B-C) (E-D) (A+D) $27,910 $472,090 1-Sep-20 472,090 $28,325 $25,000 $3,325 24,585 475,415 1-Mar-21 475,415 $28,525 $25,000 $3,525 21,060 478,940 1-Sep-21 478,940 $28,736 $25,000 $3,736 17,323 482,677 1-Mar-22 482,677 $28,961 $25,000 $3,961 13,363 486,637 1-Sep-22 486,637 $29,198 $25,000 $4,198 9,164 490,836 1-Mar-23 490,836 $29,450 $25,000 $4,450 4,714 495,286 1-Sep-23 495,286 $29,717 $25,000 $4,717 -3 500,003

Credit Date Accounts title 1-Mar-20 Cash Discount on Bonds Payable Bonds Payable To record Record Bonds Payable Debit $ 472,090 $ 27,910 $ 500,000 $ 28,325 1-Sep-20 Interest Expense Discount on Bonds Payable Cash To record Interest on Bonds Payable $ $ 3,325 25,000 19,017 31-Dec-20 Interest Expense $ Discount on Bonds Payable [ 3525 x 4/6] Cash ( 25,000 x 4/6 months TO record Interest accrual on Bonds Payable $ $ 2,530 16,667 9,508 1,667 1-Mar-20 Interest Expense $ Interest payable $ Discount on Bonds Payable [ 3525 x 2/6] Cash $ $ 1,175 25,000

$ 28,325 1-Sep-20 Interest Expense Discount on Bonds Payable Cash To record Interest on Bonds Payable $ $ 3,325 25,000 19,017 31-Dec-20 Interest Expense $ Discount on Bonds Payable [ 3525 x 4/6] Cash [ 25,000 x 4/6 months ] TO record Interest accrual on Bonds Payable $ $ 2,530 16,667 9,508 1,667 1-Mar-20 Interest Expense $ Interest payable $ Discount on Bonds Payable [ 3525 x 2/6] Cash $ $ 1,175 25,000 $ 28,736 1-Sep-21 Interest Expense Discount on Bonds Payable Cash To record Interest on Bonds Payable $ $ 3,736 25,000 19,307 31-Dec-21 Interest Expense Discount on Bonds Payable [ 3525 x 4/6] Cash ( 25,000 x 4/6 months TO record Interest accrual on Bonds Payable 2,640 16,667 $