Question

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PR 14-5A Bond discount, entries for bonds payable transactions, interest method of amortizing bond discount On July 1, 2016, Merideth Industries Inc. issued $28,500,000 of 10-year, 8% bonds at a market (effective) interest rate of 9%, receiving cash of $26,646,292. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Joumalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Joumalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond discount, us- ing the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016. PR 14-5A Bond premium, entries for bonds payable transactions, interest method of amortizing bond premium. Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued $62,500,000 of 10 year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016.

Answer 1

Bond is a fixed income security in which issuer promises pay a series of interest payment and repay the principle on maturity to the investor. The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is lower/higher as compared bond coupon rate then, the bonds were issued at a premium/discount. The premium/discount 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 premium/discount which will be amortised over the term of the bond.

Face Value $2,85,00,000 Coupon Rate 8% Market Rate 9% period (10 x 2] 20 Sales Proceeds $2,66,46,292 Disocunt on Bond $18,53,708 ($28500000-$626646292] Interest payment $ 11,40,000 ($28500000 x 8%/2] Amortisation of Premium $92,685 ($1853708/20] Journal Entry Date Account Title Debit Credit 14-5A - 1 July 1, 2016 Cash $2,66,46,292 Disocunt on Bond Payable $18,53,708 Bond Payable $2,85,00,000 (To record issuance of bond at discount) 14-5A-2(a) Dec 31, 2016 Interest Expense $11,99,083 Disocunt on Bond Payable $59,083 Cash $11,40,000 (To record interest payment and discount amortisation) 14-5A - 2(b) June 30, 2017 Interest Expense $12,01,742 Disocunt on Bond Payable $61,742 Cash $11,40,000 (To record interest payment and discount amortisation) 14-5A-3 Interest Expense for 2016 is $1199083 Effective Interest Amortisation schedule Date Beginning Bal Cash Paid Interest Exp Amortisation Ending Balance (A) (B) = $28500000 x 8%/2 (c) = (A) x 9%/2) (C)-(B) (A) + (C)-(B) July 1, 2016 $2,66,46,292 Dec 31, 2016 $2,66,46,292 $11,40,000 $11,99,083 $59,083 $2,67,05,375 June 30, 2017 $2,67,05,375 $11,40,000 $12,01,742 $61,742 $2,67,67,117 $61

9% Face Value $6,25,00,000 Coupon Rate Market Rate 8% period (10 x 2] 20 Sales Proceeds $6,67,47,178 Premium on Bond $42,47,178 ($ 66747178-$62500000] Interest payment $28,12,500 ($62500000 x 9%/2] Amortisation of Premium $2,12,359 ($4247178/20] Journal Entry Date Account Title Debit Credit 14-6A - 1 July 1, 2016 Cash $6,67,47,178 Premium on Bond Payable $42,47,178 Bond Payable $6,25,00,000 (To record issuance of bond at premium) 14-6A -2(a) Dec 31, 2016 Interest Expense $26,69,887 Premium on Bond Payable $1,42,613 Cash $28,12,500 (To record interest payment and premium amortisation) 14-6A - 2(b) June 30, 2017 Interest Expense $26,64,183 Premium on Bond Payable $1,48,317 Cash $28,12,500 (To record interest payment and premium amortisation) 14-6A-3 Interest Expense for 2016 is $2669887 Effective Interest Amortisation schedule Date Beginning Bal Cash Paid Interest Exp Amortisation Ending Balance (A) (B) = $62500000 x 9%/2 (C) = (A) x 8%/2 (B)-(C) (A) + (C)-(B) July 1, 2016 $6,67,47,178 Dec 31, 2016 $6,67,47,178 $28.12.500 $26,69,887 $1,42,613 $6,66,04,565 June 30, 2017 $6,66,04,565 $28,12,500 $26,64,183 $1,48,317| $6,64,56,248