Problem 14-1 The following amortization and interest schedule reflects the issua
ID: 2424720 • Letter: P
Question
Problem 14-1
The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2008, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements are prepared once yearly.
Amortization Schedule
Year
Cash
Interest
Amount
Unamortized
Carrying
Value
(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2008. (Round answers to 0 decimal places, e.g. 38,548. 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.)
Date
Account Titles and Explanation
Debit
Credit
January 1, 2008
(e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2008. (Interest is paid January 1.) (Round answers to 0 decimal places, e.g. 38,548. 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.)
Date
Account Titles and Explanation
Debit
Credit
December 31, 2008
(f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2015. Capulet Corporation does not use reversing entries. (Round answers to 0 decimal places, e.g. 38,548. 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.)
Date
Account Titles and Explanation
Debit
Credit
January 1, 2015
December 31, 2015
Amortization Schedule
Year
Cash
Interest
Amount
Unamortized
Carrying
Value
Explanation / Answer
a. Bond is issued at discount.
If we add the unamortized amount and the book value in first row ,we get the book value equal to book value obtained after writing off all unamortized amount,that implies it is discount and not premium.
Because in premium the initial book value will have been greater than the final book value arrived after writing off all unamortized.
The purpose of amortization is to write off discount/premium as interest so as to arrive at the book value equal to par value.
b. Amortization schedule is prepared on basis of effective interest method.As we can see ,the interest amount is increasing with the book value amount. It shows both are correlated.It happens when effective market rate is used.
In case of straight line amortization ,the amortized amount remains constant.
c.The state rate
Interest/Bond par value * 100
27192/247200*100=11%
Effective rate is the market rate at the time of issue.
For amortizing at effective rate,the book value of beginning of each period is multiplied by the market rate.
d.
Jan 1 ,2008
Bank A/C Dr 197573
Discount on issue A/C Dr 49627
To Bonds payable A/C 247200
(For issue of bond at discount)
e. Dec 31,2008
Interest A/C Dr 29636
To outstanding interest A/C 29636
(Interest amount and discount due to be amortized )
Jan 01,2009
Interest A/C Dr 29636
To discount on issue A/C 2444
To Cash A/C 27192
(For interest amount paid and discount on issue written off)
f. 2015
Dec 31,2014
Interest A/C Dr 32845
To outstanding interest A/C 32845
(Interest amount and discount due to be amortized )
Jan 01,2015
Interest A/C Dr 32845
To discount on issue A/C 5653
To Cash A/C 27192
(For interest amount paid and discount on issue written off)
Dec 31 ,2015
Interest A/C Dr 33693
To outstanding interest A/C 33693
(Interest amount and discount due to be amortized )