Alternate Demonstration Problem
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.
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
Redo Part A under the assumption that the market rate on the bonds
when issued was 16%.