Question

On June 1, 2019, Tyler Company sold $4,000,000 in long-term bonds for $3,631,300. The bonds will mature in 10 years and have a stated interest rate of 7% and a yield rate of 11%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled (Round to the nearest dollar.) (b) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2021. (Round to the nearest dollar.)

Answer 1

Based on stated interest rate and market interest rate, the issue proceeds of the bond is worked out belo $3,631,300 is not the issue price of the bond Working notes: Based on PV table Amount PV factor at 11% 0.35218 5.88923 Face value-Bond $4,000,000 Cash interest $280,000 Issue price of Bond Face value of Bond Discount on issue of bond PV of Cash flows $1,408,738 $1,648,985 $3,057,723 $4,000,000 $942,277 Cash interest is on face value of bond = $4,000,000*7%/2 = $280,000 a) Amortization table Effective-Interest Method Date Cash Interest Paid Interest expense Discount Amortization Unamortized Carrying Discount value June 1, 2019 May 31, 2020 May 31, 2021 May 31, 2022 May 31, 2023 $280,000 $280,000 $280,000 $280,000 $336,350 $342,548 $349,428 $357,065 $56,350 $62,548 $69,428 $77,065 $942,277 $885,928 $823,380 $753,951 $676,886 $3,057,723 $3,114,072 $3,176,620 $3,246,049 $3,323,114 b) Date Credit Debit $342,548 May 31, 2021 Account Titles and Explanation Interest expense Discount on bonds payable Interest payable (To record interest accrued) $62,548 $280,000