Question

1 Wiew Policies Current Attempt in Progress On June 1, 2016, Everly Bottle Company sold $3,000.000 in long-term bonds for $2.631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10 %. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31 Debit Credit Carrying Amount of Bonds Interest Expense Date Credit Cash Bond Discount 2651200 6/1/16 $ 5/31/17 5/31/18 5/31/19 5/31/20 eTextbook and Media List of Accounts Submit Anywer Attempte:0 of 2 used Save for Later

Answer 1

(a) Interest payment= 8% * $3000000 = $240000

Under effective interest method, interest expense is calculated based upon market rate or yield. Here, yield is 10%. Now,

Interest expense for all 4 years under effective interest method is:

Year 1:

Interest expense = Carrying value at the beginning of the period * Yield

Interest expense = $2631300 * 10% = $263130

Amortization of bond discount = Interest expense - Interest payment

Amortization of bond discount = $263130 - $240000 = $23130

End of period net carrying value = $2631300 - $23130 = $2608170

Year 2:

Interest expense = $2608170 * 10% = $260817

Amortization of bond discount = $260817 - $240000 = $20817

End of period net carrying value = $2608170 - $20817 = $2587353

Year 3:

Interest expense = $2587353 * 10% = $258735

Amortization of bond discount = $258735 - $240000 = $18735

End of period net carrying value = $2587353 - $18735 = $2568618

Year 4:

Interest expense = $2568618 * 10% = $256862

Amortization of bond discount = $256862 - $240000 = $16862

End of period net carrying value = $2568618 - $16862 = $2551756

Table is given below:

Date	Credit cash	Debit interest expense	Credit bond discount	Carrying amount of bonds
6/1/16				2631300
5/31/17	240000	263130	23130	2608170
5/31/18	240000	260817	20817	2587353
5/31/19	240000	258735	18735	2568618
5/31/20	240000	256862	16862	2551756

(b) On December 31, 2018, we will prorate the amount of discount amortization and interest expense for 7 months period (i.e. June 1, 2018 to December 31, 2018).

Interest payment = $3000000 * 6% * 7 / 12 = $140000

Interest expense (On bond amortization amount from June 1 2018 to May 31, 2019, i.e $258735)  = $258735 * 7 / 12 = $150929

Required journal entries are:

Date	Description	Debit	Credit
December 31, 2018	Interest expense	150929
	Interest payable		140000
	Discount on bonds payable		10929
	(for recording interest accrual and discount amortization for June 1 to December 31, 2018)