Question

P14-1 (LO1) GROUPWORK (Analysis of Amortization Schedule and Interest Entries) The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2011, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements are prepared once yearly.

Amortization Schedule
Year	Cash	Interest	Amount Unamortized	Carrying Value
1/1/2011			$5,651	$94,349
2011	$11,000	$11,322	5,329	94,671
2012	11,000	11,361	4,968	95,032
2013	11,000	11,404	4,564	95,436
2014	11,000	11,452	4,112	95,888
2015	11,000	11,507	3,605	96,395
2016	11,000	11,567	3,038	96,962
2017	11,000	11,635	2,403	97,597
2018	11,000	11,712	1,691	98,309
2019	11,000	11,797	894	99,106
2020	11,000	11,894		100,000

Instructions

(a)Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.

(b)Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.

(c)Determine the stated interest rate and the effective-interest rate.

(d)On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.

(e)On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid January 1.)

(f)On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.

Answer 1

(a)Indicate whether the bonds were issued at a premium or a discount and how you can determine this fact from the schedule.

Bonds were issued at discount, since its carrying value was less than 100,000 (Par value) that is reached at maturity.

(b)Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method, and how you can determine which method is used.

Amortization schedule is based on the effective interest method, since amount of amortization per year is not same amount.

(c)Determine the stated interest rate and the effective-interest rate.

Stated Interest rate = Cash paid/par value = 11000/100000 = 11%

Effective Interest rate = Interest expense/carrying value = 11322/94349 = 12%

(d)On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.

Date

Accouunts title and explanation

Dr($)

Cr($)

Jan 1, 2011

Cash

$        94,349

Discount on bonds payable

$          5,651

Bonds payable

$        100,000

(To record the issuance of bonds at discount)

(e)On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2011. (Interest is paid January 1.)

Date

Accouunts title and explanation

Dr($)

Cr($)

Dec 31, 2011

Interest Expense

$        11,322

Discount on bonds payable

$                322

Interest payable

$          11,000

(To record the accruals and amortization of discount on bonds payable)

(f)On the basis of the schedule above, prepare the journal entry or entries to reflect the bond transactions and accruals for 2018. Capulet Corporation does not use reversing entries.

Date

Accouunts title and explanation

Dr($)

Cr($)

Jan 1, 2018

Interest Payable

11000

Cash

11000

(To record the payment of cash payment of interest)

Dec 31, 2018

Interest Expense

$        11,712

Discount on bonds payable

$                712

Interest payable

$          11,000

(To record the accruals and amortization of discount on bonds payable)