Question

On January 1, 2019, Novak Corp. issued $3,020,000 face value, 9%, 10-year bonds at $3,222,644. This price resulted in an effective-interest rate of 8% on the bonds. Novak uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1.

Prepare the journal entries to record the following transactions. (Round answers to 0 decimal places, e.g. 15,250. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (1) The issuance of the bonds on January 1, 2019. (2) Accrual of interest and amortization of the premium on December 31, 2019. (3) The payment of interest on January 1, 2020. (4) Accrual of interest and amortization of the premium on December 31, 2020. No. Date Account Titles and Explanation Debit Credit (1) Jan. 1, 2019Dec. 31, 2019Jan. 1, 2020Dec. 31, 2020 (2) Dec. 31, 2019 (3) Jan. 1, 2019Dec. 31, 2019Jan. 1, 2020Dec. 31, 2020 (4) Dec. 31, 2020

Your answer is incorrect. Try again. Show the proper long-term liabilities balance sheet presentation for the liability for bonds payable at December 31, 2020. (Enter account name only and do not provide descriptive information.) Novak Corp. Balance Sheet For the Year Ended December 31, 2020For the Quarter Ended December 31, 2020December 31, 2020 $ AddLess :

Your answer is incorrect. Try again. What amount of interest expense is reported for 2020? Interest expense $ Would the bond interest expense reported in 2020 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The bond interest expense reported in 2020 will be greater thanless thanthe same as the amount that would be reported if the straight-line method of amortization were used

Answer 1

Solution 1:

Journal Entries -Novak Corporation
Date	Particulars	Debit	Credit
01-Jan-19	Cash Dr	$32,22,644
	To Premium on Bond payable		$2,02,644
	To bonds payable		$30,20,000
	(To record issuance)
31-Dec-19	Interest Expense Dr ($3222644*8%)	$2,57,812
	Premium on Bond Payable Dr	$13,988
	To Interest payable ($3020000*9%)		$2,71,800
	(To record accrual of Interest and Amortization of Discount on issue)
01-Jan-20	Interest Payable	$2,71,800
	To cash		$2,71,800
	(To record payment of interest)
31-Dec-20	Interest Expense Dr [($3222644 - $13988)*8%]	$2,56,692
	Premium on Bond Payable Dr	$15,108
	To Interest payable ($3020000*9%)		$2,71,800
	(To record Accrual of Interest and Amortization of Discount on issue)

SOlution 2:

Balance Sheet (Partial)
As at December 31, 2020
Long Term Liabilities:
Bond Payable	$30,20,000
Add: Unamortized Premium ($202644-$13988-$15108)	$1,73,548
Carrying Value	$31,93,548

Solution 3:

Interest expense for 2020= $256,692

Solution 4:

Straight line amortization of premium = $202644 / 10 = $20,264

Interest expense (Straight line method) = Cash payment - Straight line amortization of premium = $271800 - $20264 = $251,536

Interest expense for 2020 (effective interest method = $256,692

Therefore,  bond interest expense reported in 2020 be greater than the amount that would be reported if the straight-line method of amortization were used.