Question

On October 1st, 2018, Franklin Corporation issued $2 million of 13.5% bonds for $1,970,143.36. The bonds are due in 4 years, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14% a.Use the spreadsheet included in the module section to prepare a bond interest expense and discount amortization schedule using the straight-line method. b.Use the same spreadsheet to prepare a bond interest expense and discount amortization schedule using the effective interest method. c. Prepare any adjusting entries for the end of the fiscal year December 31, 2018, using the: 1.straight-line method of amortization 2. effective interest method of amortization Assume the company retired the bonds on June 30, 2019, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the straight-line method of amortization and the effective interest method of amortization.

straight line

effective interest

Answer 1

Franklin Corporation
Schedule of Bond Discount Amortization
Straight-Line Method
						Calculation
Date	Cash paid	Interest expense	Discount amortized	Carrying Amount		Interest expense	Discount amortized	Carrying Amount
	13.5%	14%
1-Oct-18				1,970,143.36
31-Mar-19	135,000.00	138,732.08	3,732.08	1,973,875.44		135,000+3,732.08	(2,000,000-1,970,143.36)/8	1,970,143.36+3,732.08
30-Sep-19	135,000.00	138,732.08	3,732.08	1,977,607.52		Same as above	Same as above	Same as above
31-Mar-20	135,000.00	138,732.08	3,732.08	1,981,339.60		Same as above	Same as above	Same as above
30-Sep-20	135,000.00	138,732.08	3,732.08	1,985,071.68
31-Mar-21	135,000.00	138,732.08	3,732.08	1,988,803.76
30-Sep-21	135,000.00	138,732.08	3,732.08	1,992,535.84
31-Mar-22	135,000.00	138,732.08	3,732.08	1,996,267.92
30-Sep-22	135,000.00	138,732.08	3,732.08	2,000,000.00
Calculation	2,000,000*13.5%*6/12					Cash paid plus Disc amort		Cost plus Discount amortized
Schedule of Bond Discount Amortization
Effective-Interest Method
						Calculation
Date	Cash paid	Interest expense	Discount amortized	Carrying Amount		Interest expense	Discount amortized	Carrying Amount
	13.5%	14%
1-Oct-18				1,970,143.36
31-Mar-19	135,000.00	137,910.04	2,910.04	1,973,053.40		1,970,143.36*14%*6/12	137,910.04-135,000	1,970,143.36+2,910.04
30-Sep-19	135,000.00	138,113.74	3,113.74	1,976,167.13		1,973,053.40*14%*6/12	138,113.74-135,000	1,973,053.40+3,113.74
31-Mar-20	135,000.00	138,331.70	3,331.70	1,979,498.83		1,976,167.13*14%*6/12	138,331.70-135,000	1,976,167.13+3,331.70
30-Sep-20	135,000.00	138,564.92	3,564.92	1,983,063.75
31-Mar-21	135,000.00	138,814.46	3,814.46	1,986,878.21
30-Sep-21	135,000.00	139,081.47	4,081.47	1,990,959.69
31-Mar-22	135,000.00	139,367.18	4,367.18	1,995,326.87
30-Sep-22	135,000.00	139,672.88	4,672.88	1,999,999.75
Calculation	2,000,000*13.5%*6/12					Carrying amt*14%*6/12	Int exp less cash paid	Cost plus Discount amortized

	Franklin Corporation
	Journal entries
	Date	Accounts	Debit	Credit	Calculation
Req c1		Straight-Line Method
	31-Dec-18	Interest expense	69,366.04		=138,732.08*3/6
		Discount on Bonds Payable		1,866.04	=3,732.08*3/6
		Interest Payable		67,500.00
Req c2		Effective-Interest Method
	31-Dec-18	Interest expense	68,955.02		=137,910.04*3/6
		Discount on Bonds Payable		1,455.02	=2,910.04*3/6
		Interest Payable		67,500.00
Req d1		Straight-Line Method
	30-Jun-19	Interest expense	69,366.04		=138,732.08*3/6
		Discount on Bonds Payable		1,866.04	=3,732.08*3/6
		Cash		67,500.00
	30-Jun-19	Bonds Payable	2,000,000.00
		Cash		1,960,000.00	=2,000,000*98%
		Discount on Bonds Payable		5,598.12	=3,732.08+1,866.04
		Gain on redemption of bonds		34,401.88
Req d2		Effective-Interest Method
	30-Jun-19	Interest expense	69,056.87		=138,113.74*3/6
		Discount on Bonds Payable		1,556.87	=3,113.74*3/6
		Cash		67,500.00
	30-Jun-19	Bonds Payable	2,000,000.00
		Cash		1,960,000.00	=2,000,000*98%
		Discount on Bonds Payable		4,466.90	=2,910.04+1,556.87
		Gain on redemption of bonds		35,533.10