Question

4) Atlantic Company issues 10-year bonds, as follows: Bonds are dated to be issued on: Bonds are issued on Par value of bonds: Stated annual interest rate: Price at date of issue: Semiannual interest payments: Bond issue costs incurred: Amortization method used: January 1, 20x1 June 1, 20x1 $900,000 4% 101.15 January 1 and July 1 $16,100 Straight-line Straight-line amortization of bond issue costs and premium or discount amortization are recorded once ayear, at year-end. SEE NEXT PAGE FOR REQUIREMENTS FOR PROBLEM 4 REQUIRED a) Prepare the appropriate adjusting entry (ies) on December 31, 20x1. b) Determine the interest expense reported on the income statement for the year ended December 31, 20x1. c) Determine the interest expense reported on the income statement for the year ended December 31, 20x2. d) Assume bonds were reacquired by Atlantic Company on July 1, 20x4: Percent reacquired Reacquisition price 60% 1.04 Determine the amount of gain or loss recognized at the time of reacquisition.

Answer 1

Answer

Straight-line method Amortisation It is reasonable that a bond promising to pay 12% interest will sell for more than its face value when the market is expecting to earn only 10% interest. Bond Rate /Coupon Rate 4% semiannual 2% Face Value or Maturity Value Market Value 900,000 910,350 Accrued interest (900,000 x 296x 5/6) 10 Semiannual Premium 10,350 Straight-line method Amortisation Amortisation ofCredit Balance in balance in Bond Premium Bond Premium bond payable Interest Payment (Coupon Rate FV) Cash paid Interest Expense Book Value of Bond 1-Jan-16 10,350 9,833 9,315 900,000 900,000 900,000 910,350 909,833 909,315 18,000 17,483 1-Jan-17 17,483 17,483 17,483 17,483 17,483 17,483 17,483 900,000 900,000 900,000 907,763 907,245 906,728 1-Jan-19 1-Jul-19 1-Jan-20 6,210 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 18,000 1-Jan-21 1-Jul-21 1-Jan-22 905,693 905,175 904,658 17,483 903,623 903,105 1-Jan-23 17,483 17,483 17,483 17,483 17,483 17,483 1-Jul-23 901,553 1-Jan-25 1-Jul-25 1-Jan-26 900,000 18,000 900,000 900,518 900,000 360,000 10,350

Journal Ent Debit Credit 1-Jun-16 Cash 925,350 Bond Payable Interest Payable Premium on Bond Pavable 900,000 15,000 10,350 1-Jun-16 Deferred Bond Issue Costs 16,100 Cash 16,100 1-Jul-16 Interest expense 3,000 15,000 Interest Payable Cash 18,000 31-Dec-16Interest expense 16,965 1,035 Premium on Bond Payable Interest Pavable (to record Interest expense for 6 months) 18,000 31-Dec-16Interest expense 1,610 Deferred Bond Issue Costs 1,610 (Amortised over 20 periods-for two periods) Answer b Interest expense (3,000+16,965+1610) 21,575 Answer c Interest Expnse Year 2 (17,483 +17,483 +1610) 36,575 Answer d Bond Retirement befor Maturi July 20X4 0r July 19 Balance in premium Account Balance in Bond deferement cost Balance in Bonds pavable Cash payble for Bond Retirement Cash payble for Accrued Interest Total Cash Pavable 7,245 at at 31 Dec 20X3 11,270 (16,100-1610 x 3 900,000 936,000 18,000 954,000 $104 1-Jul-19 Bonds Payable 900,000 7,245 18,000 40,025 Premium on Bond pavble Interest expense Loss on Bond Reacquisition Deferred Bond Issue Costs Cash To record early retirement of Bond) 11,270 954,000