Problem 14-5 In each of the following independent cases, the company closes its
ID: 2542297 • Letter: P
Question
Problem 14-5
In each of the following independent cases, the company closes its books on December 31.
Sanford Co. sells $500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%.
Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)
Schedule of Bond Discount Amortization
Effective-Interest Method
Bonds Sold to Yield
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Bonds
3/1/17 $
$
$
$
9/1/17
3/1/18
9/1/18
3/1/19
9/1/19
3/1/20
9/1/20
Prepare all of the relevant journal entries from the time of sale until the date indicated. (Assume that no reversing entries were made.) (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. 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
3/1/17
3/1/18
Titania Co. sells $400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back $120,000 worth of bonds for $126,000 (includes accrued interest).
Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)
Schedule of Bond Discount Amortization
Effective-Interest Method
Bonds Sold to Yield
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Bonds
6/1/17 $
$
$
$
12/1/17
6/1/18
12/1/18
6/1/19
12/1/19
6/1/20
12/1/20
6/1/21
* Difference due to rounding
Prepare all of the relevant journal entries from the time of sale until the date indicated. Give entries through December 1, 2019. (Assume that no reversing entries were made.) (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. 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
6/1/17
12/1/17
12/31/17
6/1/18
10/1/18
(To record interest expense and premium amortization)
10/1/18
(To record buy back of bonds)
12/1/18
12/31/18
6/1/19
12/1/19
Explanation / Answer
Amount ( In $) 1 1-Mar-17 Cash 472,090 Discount on Bonds Payable 27,911 Bonds Payable 500,000 Maturity Value of Bonds = 500,000 Present Value of $ 500,000 due in 7 periods at 6% = 332,530 ( $ 500,000 X 0.66506) (A) Present Value of interest payable semiannually = 139,560 ($ 25,000 X 5.58238) (B) Proceeds from sale of bonds (A)+ (B) = (472,090) Discount on Bonds Payable 27,911 1-Sep-17 Interest Expense 28,325 Discount on Bonds Payable 3,325 Cash 25,000 31-Dec-17 Interest Expense 19,017 Discount on Bonds Payable ($ 3525 X 4/6) 2,350 Interest Payable ( $ 25,000 X 4/6) 16,667 1-Mar-18 Interest Expense 9,508 Interest Payable 16,667 Discount on Bonds Payable ($ 3525 X 2/6) 1,175 Cash 25,000 1-Sep-18 Interest Expense 28,736 Discount on Bonds Payable 3,736 Cash 25,000 31-Dec-18 Interest Expense 19,307 Discount on Bonds Payable ($ 3525 X 4/6) 2,640 Interest Payable ( $ 25,000 X 4/6) 16,667 Schedule of Bond Discount Amortization Effective Interest Method 10% Bonds Sold to Yield 12% Date Credit Cash Debit Interest Expense Credit Bond Discount Carrying Value of Bonds 1-Mar-17 472,090 1-Sep-17 25,000 28,325 3,325 475,415 1-Mar-18 25,000 28,525 3,525 478,940 1-Sep-18 25,000 28,736 3,736 482,676 1-Mar-19 25,000 28,961 3,961 486,637 1-Sep-19 25,000 29,198 4,198 490,835 1-Mar-20 25,000 29,450 4,450 495,285 1-Sep-20 25,000 29,715 4,715 500,000