Question

Problem 14-05 In each of the following independent cases, the company closes its books on December 31. Swifty Co. sells $511,000 of 10% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021. Prepare a bond amortization schedule using the effective interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to O decimal places, e.g. 38,548.) Schedule of Bond Discount Amortization Effective-Interest Method Bonds Sold to Yield Cash Paid Interest Expense Discount Amortized Carrying Amount of Bonds Date 3/1/20 9/1/20 3/1/21 9/1/21 3/1/22 9/1/22 3/1/23 9/1/23 Prepare all of the relevant journal entries from the time of sale until December 31, 2021. Assume that no reversing entries were made.) (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to O decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation 3/1/20 3/1/21

Answer 1

Part 1

Schedule of Bond Premium Amortization

Effective Interest Method

Bonds Sold to Yield (10% Bonds Sold to Yield 12%)

Date	Cash paid	Interest expense	Discount amortized	Carrying amount of bonds
3/1/20				482476
9/1/20	25550	28949	3399	485875
3/1/21	25550	29152	3602	489477
9/1/21	25550	29369	3819	493296
3/1/22	25550	29598	4048	497343
9/1/22	25550	29841	4291	501634
3/1/23	25550	30098	4548	506182
9/1/23	25550	30368	4818	511000

Issue price = present value of interest payment + present value of principal = (511000*10%/2*5.58238)+(511000*0.66506) = $482476

Present value of annuity factor for $1 @ i=6%, n = 7 is 5.58238

Present value factor for $1 @ i=6%, n = 7 is 0.66506

Discount = maturity value – issue price = 511000-482476 = $28524

Cash paid = 511000*10%/2 = 25550

Interest expense = previous carrying amount * 12%/2

Discount amortized = Interest expense -Cash paid

Carrying amount of bonds = previous carrying amount + discount amortized

Date	General Journal	Debit	Credit
3/1/20	Cash	482476
	Discount on Bonds Payable	28524
	Bonds Payable		511000
9/1/20	Interest Expense	28949
	Discount on Bonds Payable		3399
	Cash		25550
12/31/20	Interest Expense	19434
	Discount on Bonds Payable (3602*4/6)		2401
	Interest Payable (25550*4/6)		17033
3/1/21	Interest Expense	9718
	Interest Payable	17033
	Discount on Bonds Payable (3602*2/6)		1201
	Cash		25550
9/1/21	Interest Expense	29369
	Discount on Bonds Payable		3819
	Cash		25550
12/31/21	Interest Expense	19732
	Discount on Bonds Payable (4048*4/6)		2699
	Interest Payable (25550*4/6)		17033

Part 2

Schedule of Bond Premium Amortization

Effective Interest Method

Bonds Sold to Yield (12% Bonds Sold to Yield 10%)

Date	Cash paid	Interest expense	Premium amortized	Carrying amount of bonds
6/1/20				388591
12/1/20	21900	19430	2470	386121
6/1/21	21900	19306	2594	383527
12/1/21	21900	19176	2724	380803
6/1/22	21900	19040	2860	377943
12/1/22	21900	18897	3003	374940
6/1/23	21900	18747	3153	371787
12/1/23	21900	18589	3311	368477
6/1/24	21900	18424	3476	365000

Issue price = present value of interest payment + present value of principal = (365000*12%/2*6.46321)+(365000*0.67684) = $388591

Present value of annuity factor for $1 @ i=5%, n = 8 is 6.46321

Present value factor for $1 @ i=5%, n = 8 is 0.67684

Premium = issue price – maturity value = 388591-365000 = $23591

Cash paid = 365000*12%/2 = 21900

Interest expense = previous carrying amount * 10%/2

Premium amortized = Cash paid- Interest expense

Carrying amount of bonds = previous carrying amount – premium amortized

Date	General journal	Debit	Credit
6/1/17	Cash	388591
	Premium on Bonds Payable		23591
	Bonds Payable		365000
12/1/17	Interest Expense	19430
	Premium on Bonds Payable	2470
	Cash		21900
12/31/17	Interest Expense (19306/6)	3218
	Premium on Bonds Payable (2594/6)	432
	Interest payable (21900/6)		3650
6/1/18	Interest Expense (19306*5/6)	16088
	Interest payable	3650
	Premium on Bonds Payable (2594*5/6)	2162
	Cash		21900
10/1/18	Interest Expense (19176*0.33*4/6)	4219
	Premium on Bonds Payable (2724*0.33*4/6)	599
	Cash (21900*0.33*4/6)		4818
	(to record interest expense and premium amortized)
10/1/18	Bonds Payable	120450
	Premium on Bonds Payable	5515
	Gain on Redemption of Bonds		3333
	Cash		122632
	(to record buy back of bonds)
12/1/18	Interest Expense (19176*0.67)	12848
	Premium on Bonds Payable (2724*0.67)	1825
	Cash (21900*0.67)		14673
12/31/18	Interest Expense (19040*0.67*1/6)	2126
	Premium on Bonds Payable (2860*0.67*1/6)	319
	Interest payable (21900*0.67*1/6)		2445
6/1/19	Interest Expense (19040*0.67*5/6)	10631
	Interest payable	2445
	Premium on Bonds Payable (2860*0.67*5/6)	1597
	Cash (21900*0.67)		14673
12/1/19	Interest Expense (18897*0.67)	12661
	Premium on Bonds Payable (3003*0.67)	2012
	Cash (21900*0.67)		14673

120450/365000 = 0.33

(1-0.32) = 0.68

Net carrying amount of bonds redeemed - Par value	120450
Unamortized premium ((0.33*(23591-2470-432-2162))-599)	5515
	125965
Reacquisition price (127450-(120450*12%*4/12))	(122632)
Gain on redemption	3333