Question

Tamarisk Inc. issued $900,000 of 10.25%, 19-year bonds on January 1, 2020, at 102. Interest is payable semi-annually on July 1 and January 1. Tamarisk Inc. uses the effective interest method of amortization for any bond premium or discount. Assume an effective yield of 10.00%. (With a market rate of 10.00%, the issue price would be slightly higher. For simplicity, ignore this.)

a) Prepare the journal entry to record the issuance of the bonds. (1/1/20)

b) Prepare the journal entry to record the payment of interest and the related amortization on July 1, 2020. (7/1/20)

c) Prepare the journal entry to record the accrual of interest and the related amortization on December 31, 2020. (12/31/20)

List of Accounts:

Accumulated Depreciation - Buildings
Accumulated Depreciation - Equipment
Accumulated Depreciation - Machinery
Allowance for Doubtful Accounts
Bad Debt Expense
Bond Interest Payable
Bonds Payable
Buildings
Cash
Common Shares
Cost of Goods Sold
Depreciation Expense
Equipment
FV-NI Investments
FV-OCI Investments
Gain on Disposal of Buildings
Gain on Disposal of Equipment
Gain on Disposal of Machinery
Gain on Redemption of Bonds
Gain on Restructuring of Debt
Gain on Sale of Investments
Interest Expense
Interest Income
Interest Payable
Interest Receivable
Inventory
Investment Property
Land
Loss on Disposal of Machinery
Loss on Redemption of Bonds
Loss on Retirement of Bonds
Loss on Restructuring of Debt
Loss on Sale of Investments
Machinery
Modification Gain or Loss
Mortgage Payable
No Entry
Notes Payable
Notes Receivable
Sales Revenue
Unearned Revenue
Unrealized Gain or Loss
Unrealized Gain or Loss - OCI

Answer 1

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 book Balance	Cash paid for interest	Interest Expense	Premium Amortisation	Carrying Value
	(A)	(B) = [$900000 x 10.25%/2]	(C ) = (A) x 5%	(D) = (B) -(C)	(A)+(C)-(B )
Jan 1, 2020					$9,18,000
July 1,2020	$9,18,000	$46,125	$45,900	$225	$9,17,775
Dec 31, 2020	$9,17,775	$46,125	$45,889	$236	$9,17,539
Sr.No	Date	Account Title		Debit	Credit
a	Jan 1, 2020	Cash		$9,18,000
		Premium on Bond Payable			$18,000
		Bond Payable			$9,00,000
b	July 1,2020	Interest Expense		$45,900
		Premium on Bond Payable		$225
		Cash			$46,125
c	Dec 31, 2020	Interest Expense		$45,889
		Premium on Bond Payable		$236
		Bond Interest Payable			$46,125