Question

Problem 14-01 The following amortization and interest schedule reflects the issuance of 10-year bonds by Sheffield Corporation on January 1, 2014, and the subsequent interest payments and charges. The company's year-end is December 31, and financial statements are prepared once yearly. Year 1/1/2014 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Amortization Schedule Amount Cash Interest Unamortized $24,211 $13,266 $14,458 23,019 13,266 14,637 21,648 13,266 14,843 20,071 13,266 15,079 18,258 13,266 15,351 16,173 13,266 15,664 13,775 13,266 16,024 11,017 13,266 16,437 7,846 13,266 16,913 4,199 13,266 17,465 Carrying Value $ 96,389 97,581 98,952 100,529 102,342 104,427 106,825 109,583 112,754 116,401 120,600 (a) Indicate whether the bonds were issued at a premium or a discount. (b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method. (c) Determine the stated interest rate and the effective-interest rate. (Round answers to o decimal places, e.g. 18%.) The stated rate The effective rate (d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2014. (If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit Date January 1, 2014

Answer 1

1) Bond is issued less than face value so it is issued at discount

2) Bonds every year interest expense is different so it is used effective interest method

3) Stated interest rate = 13266/120600 = 11%

Market interest rate = 14458/96389 = 15%

4) Journal entry

Date	account and explanation	Debit	Credit
Jan 1	Cash	96389
	Discount on bonds payable	24211
	Bonds payable		120600

5) Journal entry

Date	account and explanation	Debit	Credit
Dec 31	Interest expense	14458
	Discount on bonds payable		1192
	Interest payable		13266

6) Journal entry

Date	Account title and explanation	Debit	Credit
Jan 1	Interest payable	13266
	Cash		13266
Dec 31	Interest expense	16437
	Discount on bonds payable		3171
	Interest payable		13266