Question

Computer Inc. is one of the pioneers in the manufacture of microprocessor for computers. On April 1, 2018, Intel issued $1,600,000 of 12% face value bonds for $1,703,411.40. The bonds are due in 4 years, and pay interest semiannually on September 30 and March 31. Intel sold the bonds to yield 10%. a.Use the spreadsheet included in the module section to prepare a bond interest expense and premium amortization schedule using the straight-line method. b.Use the same spreadsheet to prepare a bond interest expense and premium 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 retires the bonds on June 30, 2019, at 103 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.

I have completed the schedules, but I am confused about C. I am unsure of how to complete the adjusted entries.

Answer 1

a)Schedule on Straight line method:
on SLM	(1703411.40-1600000)/(4*2)
Amortisation every half year = 12926.43
b) Schedule on effective interest method:
period	Interest paid	Interest expense	Amt. Amortised	Carrying Amt.
Ap 1,18				1703411.4
Sp 30, 18	96000	85170.57	10829.43	1692581.97
Mr 31, 19	96000	84629.0985	11370.9015	1681211.069
Sp 30, 19	96000	84060.5534	11939.44658	1669271.622
c) Adjustment entry on Dec 31, 18:
on Straight line method:
date	Accounts Title	Debit $	Credit $	DETAILS/CALCULATIONS
Dec 31,18	Interest expense	41536.785
	Premium on Bond issue	6463.215		(12926.43/2)
	Interest payable		48000
	(being adjustment entry of interest due)
on effective interest method:
date	Accounts Title	Debit $	Credit $
Dec 31,18	Interest expense	42314.55
	Premium on Bond issue	5685.45		(11370.90/2)
	Interest payable		48000
	(being adjustment entry of interest due)
Retirement entry:
on Straight line method:
30-Jun-19	Bond Payable	1600000
	Premium on Bond issue	71095		1703411.4-1600000 -(12926.43*2.5)
	Interest Expense	41537		(96000/2)-(12926.43/2)interest paid adjusted premium amortisation
	Gain on redemption of bond		16632	(balancing figure)
	Cash		1696000	(1600000*103/100+48000)with interest amount
	(being bond retirement with premium on issue adjustment
	after 1.5 years interest payment with premium adjusted)
on effective interest method:
30-Jun-19	Bond Payable	1600000
	Premium on Bond issue	75241		1703411.4-1600000 -(10829.43+11370.9+(11939.45/2))
	Interest Expense	42031		(96000/2)-(11939.45/2)interest paid adjusted premium amortisation
	Gain on redemption of bond		21272	(balancing figure)
	Cash		1696000	(1600000*103/100+48000)with interest amount
	(being bond retirement with premium on issue adjustment
	after 1.5 years interest payment with premium adjusted)