Question

Problem 14-5 In each of the following independent cases, the company closes its books on December 31. Pronghorn Co. sells $537,000 of 8% bonds on March 1, 2017, The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020, The bonds yield 12% 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 0 decimal places, e.g. 38,548.) Schedule of Bond Discount Amortization Effective-Interest Method Bonds Sold to Yield Cash Paid Interest Expense Discount Amortizedos Carrying Amount of Bonds Date 3/1/20 9/1/20

Answer 1

Bond Discount Amortization Schedule
Date		Amount Paid		Interest Expense (6%)		Discount Amortized		Carrying Amount of Bonds
3/1/17								472,090
9/1/17		25,000		28,325		3,325		475,415
3/1/18		25,000		28,525		3,525		478,940
9/1/18		25,000		28,736		3,736		482,676
3/1/19		25,000		28,961		3,961		486,637
9/1/19		25,000		29,198		4,198		490,835
3/1/20		25,000		29,450		4,450		495,285
9/1/20		25,000		29,715		4,715		500,000

3/1/17	Cash................................................................................ ........................................................................................		472,090
	Discount on Bonds Payable.............................................		27,910
	Bonds Payable.......................................................			500,000
Workings for discount: MV of the bond				500,000
PV of $500,000 due in 7 half years at 6%
(500,000 *0.66506)............................................................			332,530
PV of interest payable semiannually
(25,000*5.58238)...............................................................			139,560
Sale price of bonds................................................................				(472,090)
Discount on bonds payable...................................................				27,910
9/1/17		Interest Expense...........................................................	28,325
		Discount on Bonds Payable...............................		3,325
		Cash...................................................................		25,000

12/31/17	Interest Expense...................................................	19,017
	Discount on Bonds Payable
	(3,525 * 4/6)............................................		2,350
	Interest Payable (25,000 * 4/6)...................		16,667
3/1/18	Interest Expense...................................................	9,508
	Interest Payable....................................................	16,667
	Discount on Bonds Payable
	(3,525 * 2/6)............................................		1,175
	Cash............................................................		25,000
9/1/18	Interest Expense...................................................	28,736
	Discount on Bonds Payable........................		3,736
	Cash............................................................		25,000
12/31/18	Interest Expense...................................................	19,308
	Discount on Bonds Payable
	(3,961 * 4/6)............................................		2,641
	Interest Payable..........................................		16,667

2) Titania Co.

Date		Amount Paid		Interest Expense (5%)		Premium Amortized		Carrying Amount of Bond
6/1/17								425,853
12/1/17		24,000		21,293		2,707		423,146
6/1/18		24,000		21,157		2,843		420,303
12/1/18		24,000		21,015		2,985		417,318
6/1/19		24,000		20,866		3,134		414,184
12/1/19		24,000		20,709		3,291		410,893
6/1/20		24,000		20,545		3,455		407,438
12/1/20		24,000		20,372		3,628		403,810
6/1/21		24,000		20,190		3,810		400,000

6/1/17	Cash...............................................................................	425,853
	Premium on Bonds Payable.................................		25,853
	Bonds Payable......................................................		400,000
Calculations: Maturity value of bonds			400,000
PV of $400,000 due in 8 half years at 5%
(400,000 * 0.67684)............................................................		270,736
PV of interest payable semiannually
(24,000 * 6.46321)..............................................................		155,117
Sale value of bonds................................................................			425,853
Premium on bonds payable....................................................			25,853

12/1/17	Interest Expense.............................................	21,293
	Premium on Bonds Payable............................	2,707
	Cash (400,000 *0.06)............................		24,000
12/31/17	Interest Expense (21,157 * 1/6)......................	3,526
	Premium on Bonds Payable
	(2,843 * 1/6)................................................	474
	Interest Payable (24,000 * 1/6)..............		4,000

6/1/18	Interest Expense (21,157 * 5/6)............................	17,631
	Interest Payable....................................................	4,000
	Premium on Bonds Payable
	(2,843 * 5/6)......................................................	2,369
	Cash............................................................		24,000
10/1/18	Interest Expense
	(21,015 *0.3 X 4/6)...........................................	4,203
	Premium on Bonds Payable
	(2,985 X0.3 X 4/6)............................................	597
	Cash............................................................		4,800
	Proportion of bonds bought back = 120,000/400,000 = 0.3

10/1/18	Bonds Payable......................................................	120,000
	Premium on Bonds Payable.................................	5,494
	Gain on Redemption of Bonds...................		4,294
	Cash............................................................		121,200
Workings: Reacquisition price
126,000 – Interest of 120,000 * 12% * 4/12)			121,200
Carrying amount of bonds bought back:
Par value		120,000
Unamortized premium
[0.3 * (25,853 – 2,707 – 2,843)] – 597		5,494	(125,494)
Gain on redemption			(4,294)

12/1/18	Interest Expense (21,015 *0.7*)......................	14,711
	Premium on Bonds Payable
	(2,985 *0.7)..................................................	2,089
	Cash (24,000 * 0.7)................................		16,800
Note:	70% is the proportion of bonds outstanding
12/31/18	Interest Expense (20,866 *0.7 * 1/6)...............	2,434
	Premium on Bonds Payable
	(3,134 *0.7 * 1/6)..........................................	366
	Interest Payable
	(24,000 *0.7 X 1/6).............................		2,800
6/1/19	Interest Expense (20,866 *0.7 * 5/6)...............	12,172
	Interest Payable...............................................	2,800
	Premium on Bonds Payable
	(3,134 *0.7 *5/6)...........................................	1,828
	Cash (24,000 *0.7).................................		16,800
12/1/19	Interest Expense (20,709 * 0.7).......................	14,496
	Premium on Bonds Payable
	(3,291 * 0.7).................................................	2,304
	Cash (24,000 * 0.7)................................		16,800