Alternate Demonstration Problem
Chapter Fourteen
Note: Instructor can choose the interest amortization method. Solution one
demonstrates the straight line method and solution two demonstrates the
effective interest method.
ABC Company issued $200,000 face value bonds on January 1, 2015, with
semiannual interest payments to be made on June 30 and December 31 at a
contract rate of 10%. The bonds were scheduled to mature five years after
they were issued. On January 1, 2018, three years after the bonds were
issued, the company repurchased 40% of the outstanding bonds for
$79,000.
Required:
Part A
1. Assume that the bonds were issued when the market rate of interest
was 9%. Show calculation of issue price. If using the effective interest
method of amortization, prepare a schedule showing the bond interest
expense and amounts of amortization for the life of the bonds. If using
straight line, show the calculation of the periodic amortization within
the appropriate journal entries explanations.
2. Prepare the journal entry to record the bond issuance.
3. Prepare journal entries for the first two interest payments.
4. Prepare the journal entry to recognize the partial repurchase of the
bonds.
Part B
Redo Part A under the assumption that the market rate on the bonds when
issued was 16%.
Solution One: Alternate Demonstration Problem
Using Straight Line Interest Method of Amortization
Chapter Fourteen
1. Calculation of cash received upon issuance of bonds (issue price):
Present value of $200,000 to be
received in 10 periods, discounted
at 4.5% per period
$200,000 x .6439 = $128,780
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 4.5% per period
$10,000 x 7.9127 = 79,127
$207,907
2. 1/1/15
Cash………………………………………………………….. 207,907
Bonds Payable……………………………………… 200,000
Premium on Bonds Payable…………………… 7,907
3. 6/30/15
Bond Interest Expense……………………………….. 9,309.30
Premium on Bonds Payable………………………… 790.70
Cash…………………………………………………….. 10,000.00
(7,907 / 10 periods = 790.70 per period)
12/31/15
Bond Interest Expense……………………………….. 9,309.70
Premium on Bonds Payable………………………… 790.70
Cash…………………………………………………….. 10,000.00
4. 1/1/18
Bonds Payable…………………………………………… 80,000.00
Premium on Bonds Payable………………………… 1265.12*
Cash…………………………………………………….. 79,000.00
Gain on the Retirement of Bonds……………. 2,265.12**
*($7,907—4,744 [6 periods amortization]
=$3,162.80 unamortized premium x 40% =
1265.12)
** $80,000 + 1265.12 = 81265.12 Carrying Value –
Redemption Price $79,000 = Gain $2,265.12
Part B
1. * Calculation of cash received upon issuance of bonds (issue price):
Present value of $200,000 to be
received in 10 periods, discounted
at 8% per period
$200,000 x .4632 = $ 92,640
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 8% per period
$10,000 x 6.7101 = 67,101
$159,741
2. 1/1/15
Cash………………………………………………………….. 159,741
Discount on Bonds Payable………………………… 40,259
Bonds Payable……………………………………… 200,000
3. 6/30/15
Bond Interest Expense……………………………….. 14,025.90
Discount on Bonds Payable…………………… 4,025.90
Cash…………………………………………………….. 10,000.00
(40,259/10 periods = 4,025.90 per period)
4. 12/31/15
Bond Interest Expense……………………………….. 14,025.90
Discount on Bonds Payable…………………… 4,025.90
Cash…………………………………………………….. 10,000.00
1/1/18
Bonds Payable…………………………………………… 80,000.00
Loss on the Retirement of Bonds………………… 5,441.44
Discount on Bonds Payable…………………… 6,441.44
Cash…………………………………………………….. 79,000.00
*(40,259—24,155.40 [6 periods amortization]
= 16,103.60 unamortized discount x 40% =
6,441.44)
** $80,000 – 6,441.44 = 73,558.56 Carrying
Value compared to Redemption Price
$79,000 = Loss 5,441.44
Solution Two: Alternate Demonstration Problem
Using Effective Interest Method of Amortization
Chapter Fourteen
1.
Period
Beginning
of Period
Carrying
Amount
Interest
Expense
to be
Recorded
Interest
to be Paid
to
Bond-hold
ers
Premium
to be
Amortized
Unamortized
Premium end
of Period
End-of-Perio
d Carrying
Amount
0 $7,907 $207,907 *
1 $207,907 $9,356 $10,000 $644 7,263 207,263
2 207,263 9,327 10,000 673 6,590 206,590
3 206,590 9,297 10,000 703 5,887 205,887
4 205,887 9,265 10,000 735 5,152 205,152
5 205,152 9,232 10,000 768 4,384 204,384
6 204,384 9,197 10,000 803 3,581 203,581
7 203,581 9,161 10,000 839 2,742 202,742
8 202,742 9,123 10,000 877 1,865 201,865
9 201,865 9,084 10,000 916 949 200,949
10 200,949 9,051 10,000 949 0 200,000
* Calculation of cash received upon issuance of bonds:
Present value of $200,000 to be
received in 10 periods, discounted
at 4.5% per period
$200,000 x .6439 = $128,780
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 4.5% per period
$10,000 x 7.9127 = 79,127
$207,907
2. 1/1/15
Cash………………………………………………………….. 207,907
Bonds Payable……………………………………… 200,000
Premium on Bonds Payable…………………… 7,907
3. 6/30/15
Bond Interest Expense……………………………….. 9,356
Premium on Bonds Payable………………………… 644
Cash…………………………………………………….. 10,000
12/31/15
Bond Interest Expense……………………………….. 9,327
Premium on Bonds Payable………………………… 673
Cash…………………………………………………….. 10,000
4. 1/1/18
Bonds Payable…………………………………………… 80,000
Premium on Bonds Payable………………………… 1,432
Cash…………………………………………………….. 79,000
Gain on the Retirement of Bonds……………. 2,432
Part B
1.
Period
Beginning
of-Period
Carrying
Amount
Interest
Expense
to be
Recorded
Interest to
be Paid
to
Bond-hold
ers
Discount
to be
Amortized
Unamortized
Discount end
of Period
End-of-Perio
d Carrying
Amount
0 $40,259 $159,741 *
1 $159,741 $12,779 $10,000 $2,779 37,480 162,520
2 162,520 13,002 10,000 3,002 34,478 165,522
3 165,522 13,242 10,000 3,242 31,236 168,764
4 168,764 13,501 10,000 3,501 27,735 172,265
5 172,265 13,781 10,000 3,781 23,954 176,046
6 176,046 14,084 10,000 4,084 19,870 180,130
7 180,130 14,410 10,000 4,410 15,460 184,540
8 184,540 14,763 10,000 4,763 10,697 189,303
9 189,303 15,144 10,000 5,144 5,553 194,447
10 194,447 15,553 10,000 5,553 0 200,000
* Calculation of cash received upon issuance of bonds:
Present value of $200,000 to be
received in 10 periods, discounted
at 8% per period
$200,000 x .4632 = $ 92,640
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 8% per period
$10,000 x 6.7101 = 67,101
$159,741
2. 1/1/15
Cash………………………………………………………….. 159,741
Discount on Bonds Payable………………………… 40,259
Bonds Payable……………………………………… 200,000
3. 6/30/15
Bond Interest Expense……………………………….. 12,779
Discount on Bonds Payable…………………… 2,779
Cash…………………………………………………….. 10,000
4. 12/31/15
Bond Interest Expense……………………………….. 13,002
Discount on Bonds Payable…………………… 3,002
Cash…………………………………………………….. 10,000
1/1/18
Bonds Payable…………………………………………… 80,000
Loss on the Retirement of Bonds………………… 6,948
Discount on Bonds Payable…………………… 7,948
Cash…………………………………………………….. 79,000