Question

9. On January 1, 2020, Shoreline Company sold 12% bonds having a maturity value of $700,000 for $811,794, which provides the bondholders with a 8% yield. The bonds are dated January 1, 2020, and mature January 1, 2025, with interest payable December 31 of each year. Shoreline Company allocates interest and unamortized discount or premium on the effective-interest basis.

Prepare the journal entry at the date of the bond issuance. (Round answer to 0 decimal places, e.g. 79,547 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.)

Prepare a schedule of interest expense and bond amortization for 2020–2022. (Round answer to 0 decimal places, e.g. 79,547.) Prepare the journal entry to record the interest payment and the amortization for 2020. (Round answer to 0 decimal places, e.g. 79,547. 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.)

Prepare the journal entry to record the interest payment and the amortization for 2022. (Round answer to 0 decimal places, e.g. 79,547. 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

Ans a Credit Debit $8,11,794 Date Particulars 1-Jan-20 Cash Premium on Bond Payable Bond Payable (To Record issuance of Bond) $1,11,794 $7,00,000 Ans b The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/(premium) which will be amortised. Amortisation schedule (Effective Interest Method) Date Opening Cash Closing Book Interest Expense Amortisation of Bond Premium book Balance Payment Value (a) (B) = $700000 Computation (C) (D)=(C)-(B) Computation (A)+(C)-(B) x 12% (A) x 8% 1-Jan-20 $8,11,794 31-Dec-20 $8,11,794 $84,000 ($811794 x(8%)] $64,944 ($84000-$64944] $19,056 $7,92,738 31-Dec-21 $7,92,738 $84,000 ($792738 x(8%)] $63,419 ($84000-$63419] $20,581 $7,72,157 31-Dec-22 $7,72,157 $84,000 [$772157 x(8%)] $61,773 ($84000-$61773] $22,227 $7,49,930 31-Dec-23 $7,49,930 $84,000 ($749930 x(8%)] $59,994 ($84000-$59994] $24,006 $7,25,924 31-Dec-24 $7,25,924 $84,000 ($725924 x(8%)] $58,076 ($84000-$58076] $25,924 $7,00,000 Credit Ansc_ Debit $64,944 $19,056 $84,000 Date Particulars 31-Dec-20 Interest Expense Premium on Bond Payable Cash (To Record interest payment and amortisation) 31-Dec-22 Interest Expense Premium on Bond Payable Cash (To Record interest payment and amortisation) Ans D $61,773 $22,227 $84,000