On January 1, Year 5, ATTN issued a semi-annual bond. All of the funds from the

Question

On January 1, Year 5, ATTN issued a semi-annual bond.  All of the funds from the bond were used to purchase the assets of an unlucky competitor that went bankrupt.  The following tables include the basic information about the bond and the purchased assets.

Make all of the necessary journal entries to record the issuance of the bond, the purchase of the assets, the interest payments on the bond using the effective interest method, and the depreciation of the new assets during Year 5.  Assume that all of the new assets have a useful life of 15 years with NO salvage value and that ATTN uses the Straight-Line Method for calculating depreciation.

Explanation / Answer

Calulation of Discount on Issue of Bonds Market Value of Bonds payable          1,395,000 PV of $1,395,000 due in 28 periods at 3% ($1,395,000 X 0.4371)          609,755 PV of interest payable semiannually ($34875 X 18.7641)          654,398 Proceeds from sale of Bonds          1,264,152 Discount on Issue of Bonds              130,848 Bond Discount Amortization Schedule Under Effective Interest Rate Method Year Interest Payment Interest Expense Discount Amortization Unamortized Discount Bond Carrying Value A = 1,395,000 X 2.5% B = Preceding Bond Carrying Value X 3% C = B-A E = 1,395,000 - D 1/1/05                 130,848          1,264,152 30/6/05                    34,875                       37,925                      3,050                 127,798          1,267,202 31/12/05                    34,875                       38,016                      3,141                 124,657          1,270,343 Allocation of cost in proportion to appraised value at date of purchasesexchange: Fair Value % of Total Allocation of Cost Dep. Charged (Straight Line Method) Land          195,300 8.00%                  101,132                         6,742 Office Building          390,600 16.00%                  202,264                       13,484 Storage Facility          585,900 24.00%                  303,397                       20,227 Production Building          214,830 8.80%                  111,245                         7,416 machinery      1,054,620 43.20%                  546,114                       36,408      2,441,250              1,264,152                       84,277 Journal Entry Date Particulars Dr. Amt Cr. Amt Jan 1 Cash                                                                               Dr.    1,264,152 Year 5 Discount on issue of Bonds                                  Dr.       130,848     To Bonds Payable    1,395,000 Jan 1 Land                                                                               Dr.       101,132 Year 5 Office Building                                                           Dr.       202,264 Building - Storage Facility                                      Dr.       303,397 Building - Production                                               Dr.       111,245 Machinery                                                                     Dr.       546,114     To Cash    1,264,152 June 30 Interest Exp                                                                   Dr.          37,925 Year 5     To Cash          34,875     To Discount on Issue of Bonds            3,050 Dec 31 Interest Exp                                                                   Dr.                   -   Year 5     To Cash                   -       To Discount on Issue of Bonds                   -   Dec 31 Depreciation Exp.                                                        Dr.          84,277 Year 5     To Accumulated Dep. - Land            6,742     To Accumulated Dep. - Office Building          13,484     To Accumulated Dep. - Building - Storage Facility             20,227     To Accumulated Dep. - Building - Production                7,416     To Accumulated Dep. - Machinery                       36,408

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