Problem 14-1 The following amortization and interest schedule reflects the issua
ID: 2485034 • Letter: P
Question
Problem 14-1
The following amortization and interest schedule reflects the issuance of 11-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
(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 0 decimal places, e.g. 38,548.)
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.)
(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.)
(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.)
Amortization Schedule
Year
Cash
Interest
Amount
Unamortized
Carrying
Value
Explanation / Answer
(a)
Determination of Discount or premium:
Issue Price of the Bonds is $187001
And Face value of Bonds is $ 212,000
Hence, Bonds are issued at discount , because the Issue price is less than the Face value.
(b)
Determination of Method of amortization:
Amount amortized for Year 2008 = (25199-23979)
$ 1,220
Amount amortized for Year 2007 = (23979- 22612)
$ 1,367
Amortization amount for each year is different, hence the amortization schedule is based on the effective-interest method
(c)
Calculation of Stated interest rate and effective interest rate :
Stated interest rate = Cash Interest Paid / Face Value
=21220/212200 =
10%
Effective interest rate = Interest Expense / Carrying Value
= 22440 / 187001 =
12%
(d)
Journal entry for issuance of bonds:
Date
Accounts Title and Explanations
Debit
Credit
1/1./2008
Cash
$ 187,001
Discount on Bonds payable (212200 - 187001)
$ 25,199
Bonds Payable
$ 212,200
(Being bonds issued at discount and cash received)
(a)
Determination of Discount or premium:
Issue Price of the Bonds is $187001
And Face value of Bonds is $ 212,000
Hence, Bonds are issued at discount , because the Issue price is less than the Face value.
(b)
Determination of Method of amortization:
Amount amortized for Year 2008 = (25199-23979)
$ 1,220
Amount amortized for Year 2007 = (23979- 22612)
$ 1,367
Amortization amount for each year is different, hence the amortization schedule is based on the effective-interest method
(c)
Calculation of Stated interest rate and effective interest rate :
Stated interest rate = Cash Interest Paid / Face Value
=21220/212200 =
10%
Effective interest rate = Interest Expense / Carrying Value
= 22440 / 187001 =
12%
(d)
Journal entry for issuance of bonds:
Date
Accounts Title and Explanations
Debit
Credit
1/1./2008
Cash
$ 187,001
Discount on Bonds payable (212200 - 187001)
$ 25,199
Bonds Payable
$ 212,200
(Being bonds issued at discount and cash received)