Question

Walker Incorporated sold $500,000 of 10% bonds on January 1, 2020 for a price that yields a 12% interest rate. The bonds pay interest semi-annually on June 30 and December 31. The bonds are due December 31, 2024. Walker uses the effective interest method.

Instructions:

1. Determine the selling price of the bonds on January 1, 2020.

2. Prepare an amortization schedule using the effective interest method.

3. Prepare the journal entries for 2020.

4. Assume the company reacquired the bonds on July 1, 2023, at 104 and prepare journal entry to record the retirement of the bonds.

5. Assume Walker Incorporated used the straight-line method to amortize the premium or discount. Prepare the journal for June 30, 2020 to record interest expense.

Answer 1

Solution

Walker Incorporated

1. Determination of the selling price of bonds on January 1, 2020:

Selling price of bonds = present value of bonds + present value of interest payments

Present value of bonds = face value x (P/F, 6%, 10)

N = 5 x 2 semi-annual periods = 10

Effective interest rate = 12% x 6/12 = 6%

Face value of bonds = $500,000

Present value of bonds = 500,000 x (P/F, 6%, 10)

= 500,000 x 0.5584 = $279,200

Present value of interest payments –

Semi-annual interest payments = 500,000 x 10% x 6/12 = $25,000

Present value of interest payments = 25,000 x (P/A, 6%, 10)

= 25,000 x 7.36 = $184,000

Selling price of bonds = 279,200 + 184,000 = $463,200

Selling price of the bonds = $463,200

Discount on bonds payable = 500,000 – 463,200 = $36,800

2. Amortization schedule (effective interest method)

Amortization Schedule
Date	Interest Payment	Interest Expense	Discount Amortization	Carrying value of bonds
Jan 1, 2020	-	-	-	4,63,200
June 30, 2020	25,000	27,792	$2,792	$465,992
Dec 31, 2020	$25,000	$27,960	$2,960	$468,952
June 30, 2021	$25,000	$28,137	$3,137	$472,089
Dec 31, 21	$25,000	$28,325	$3,325	$475,414
June 30, 22	$25,000	$28,525	$3,525	$478,939
Dec 31, 22	$25,000	$28,736	$3,736	$482,675
June 30, 23	$25,000	$28,961	$3,961	$486,636
Dec 31, 23	$25,000	$29,198	$4,198	$490,834
June 30, 24	$25,000	$29,450	$4,450	$495,284
Dec 31, 24	$25,000	$29,717	$4,717	$500,000
total	$250,000	2,58,276	$36,800

Note: interest expense = 6% x carrying value of bond

Discount amortization = interest expense – interest payment

Carrying value beginning carrying value + discount amortization

3. Journal entries for 2020:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2020	Cash	$463,200
	Discount on Bonds Payable	$36,800
	Bonds Payable		$500,000
	(To record issue of bonds)
June 30, 2020	Interest Expense	$27,792
	Discount on Bonds Payable		$2,792
	Cash		$25,000
	(To record semi-annual interest payment)
Dec 31, 2020	Interest Expense	$27,960
	Discount on Bonds Payable		$2,960
	Cash		$25,000
	(To record second interest payment)

4. Entry to record retirement of bonds on July 1, 2023 at $104:

Date	Account Titles and Explanation	Debit	Credit
July 1, 2023	Bonds Payable	$500,000
	Loss on Retirement of Bonds	$33,365
	Cash		$520,000
	Discount on Bonds Payable		$13,365

Computations:

Book value of bond at July 1, 2023 = face value – unamortized discount

Face value = 500,000

Unamortized discount on bonds payable = 13,365 (3,961 + 4,198 + 4,450 + 4,717)

Bonds net carrying value = $486,635

Reacquired value = $500,000 x 104% = 520,000

Loss on bond reacquisition = 520,000 – 486,635 = $33,365

5. Straight line method of discount amortization –

Entry on June 30, 2020:

Date	Account Titles and Explanation	Debit	Credit
June 30, 2020	Interest Expense	$28,680
	Discount on Bonds Payable		$3,680
	Cash		$25,000
	(To record semi-annual interest payment)

Computations:

Straight line method of discount amortization –

Discount on bonds payable = $36,800

Period = 10

Discount amortization for each semi-annual period = 36,800/10 = $3,680

Payment of interest = $25,000

Interest expense = 28,680