Problem 14-1 The following amortization and interest schedule reflects the issua
ID: 2334149 • Letter: P
Question
Problem 14-1 The following amortization and interest schedule reflects the issuance of 10-year bonds by Ayayai Corporation on January 1, 2011, and the subsequent interest payments and charges. The company's year-end is December 31, and financial statements are prepared once yearly. Cash Interest Unamortized Value $6,306 105,294 ,947 105,653 ,545 106,055 5,094 106,506 4,589107,011 4,024 107,576 3,391 108,209 2,682 108,918 1,888 109,712 999 110,601 11,600 1/1/2011 2011 ,276 $12,635 2012 12,276 12,678 2013 2,276 12,727 2014 12,276 12,781 2015 12,27612.84 016 12,276 12,909 2017 12,276 12,985 2018 12,276 13,070 019 12,276 13,165 2020 12,276 13,275 (a) Indicate whether the bonds were issued at a premium or a discount. (b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method (c) Determine the stated interest rate and the effective-interest rate. (Round answers to O decimal places, eg. 18%.) The stated rate The effective rate (d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts, Credit account titles are automatically indented when amount is entered. Do not indent manually.)Explanation / Answer
a. These bonds are issued at discount with a discount amount of 6306
b. The amortised schedule is based on Effective interest rate not on straight line method. If it is a straight line methos the amortised value per year will be same but here it is different
c. Stated interest rate is the rate stated while investing in the bonds i.e 11%
Effective interest rate is
Considering 2011 interest amount is 12635, Discount amortised= (6306-5947) = 359
Total interest expense = 12635 which is inclusive of 12635
Divide this interest with the average of 105294 and 111600 = 108447
Effective interest rate = 12635/108447*100= 11.65% = 12%
d.
Journal entry to record the issuance of bond
Jan 1 2017..........Cash A/c ..............................Dr 105294
............................Discount on bonds payable..Dr 6306
......................................To Bonds Payable .......................111600
e.
Dec 31,2011 Interest expense A/c.............Dr 12635
.............................To Discount on Bonds payable 359
.............................To Cash A/c.......................................12276
Dec 31,2011 Interest accured A/c .............Dr 12635
.........................To Interest expense a/c ................12635
f.
Dec 31,2018 Interest expense A/c.............Dr 13070
.............................To Discount on Bonds payable 794
.............................To Cash A/c.......................................12276
Dec 31,2018 Interest accured A/c .............Dr 13070
.........................To Interest expense a/c ................13070
Thank You