Problem 14–3 (continued)
Requirement 3
(effective interest)
(straight-line)
Requirement 4
By the straight-line method, a company determines interest indirectly by
allocating a discount or a premium equally to each period over the term to
Allocating the discount or premium equally over the life of the bonds by the
Unchanging dollar amounts like these are not produced when the effective
Remember that the “straight-line method,” is not an alternative method of
Problem 14–3 (concluded)
Requirement 5
The amortization schedule in requirement 1 gives us the present value, which
represents fair value since the market rate still is 10%. The outstanding debt
This can be confirmed by calculating the present value:
¥4.5% x $10,000
*Present value of an ordinary annuity of $1: n = 3, i = 5% (Table 4)
** Present value of $1: n = 3, i = 5% (Table 2)
Problem 14–4
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Requirement 5
Requirement 6
Requirement 7
Requirement 8
(Total cash interest plus the discount)
Problem 14–5
Requirement 1
Interest $3,600,000¥x 6.46321 * = $23,267,556
*Present value of an ordinary annuity of $1: n = 8, i = 5% (Table 4)
** Present value of $1: n = 8, i = 5% (Table 2)
Requirement 2
(a) Cromley
Cash Effective Increase in Outstanding
Payment Interest Balance Balance
4.5% x Face Amount 5% x Outstanding Balance Discount Reduction
77,414,756
1 3,600,000 .05 (77,414,756) = 3,870,738270,738 77,685,4
94
2 3,600,000 .05 (77,685,494) = 3,884,275284,275 77,969,7
69
3 3,600,000 .05 (77,969,769) = 3,898,488298,488 78,268,2
57
* rounded.
Problem 14–5 (continued)
(b) Barnwell
Cash Effective Increase in Outstanding
Payment Interest Balance Balance
4.5% x Face Amount 5% x Outstanding Balance Discount Reduction
77,415
1 3,600 .05 (77,415) = 3,871 271 77,686
2 3,600 .05 (77,686) = 3,884 284 77,970
3 3,600 .05 (77,970) = 3,899 299 78,269
*rounded
Requirement 3
February 1, 2018 (Cromley)
Bonds payable (face amount)………………………..
February 1, 2018 (Barnwell)
Problem 14–5 (continued)
Requirement 4
July 31, 2018 (Cromley)
July 31, 2018 (Barnwell)
December 31, 2018 (Cromley)
December 31, 2018 (Barnwell)
January 31, 2019 (Cromley)
January 31, 2019 (Barnwell)
Problem 14–5 (concluded)
July 31, 2019 (Cromley)
Interest expense (from schedule) ………………………….. 3,898,488
July 31, 2019 (Barnwell)
Cash (from schedule)………………………………………. 3,600
December 31, 2019 (Cromley)
Interest expense (5/6 x $3,913,413)……………………….. 3,261,177
December 31, 2019 (Barnwell)
Interest receivable (5/6 x $3,600)………………………. 3,000
January 31, 2020 (Cromley)
Interest expense (1/6 x $3,913,413)……………………….. 652,236*
January 31, 2020 (Barnwell)
Cash (stated rate x face amount)…………………………. 3,600
*rounded
Problem 14–6
Requirement 1
April 1, 2018 (Western)
Cash ($29,300,000 + [1/12 x 12% x $30,000,000])…….. 29,600,000
April 1, 2018 (Stillworth)
Investment in bonds (face amount)…………………… 30,000
Alternative: Some accountants prefer to credit (debit) interest expense
(revenue), rather than interest payable (receivable), when bonds are
sold (purchased).
April 1, 2018 (Western)
Cash ($29,300,000 + [1/12 x 12% x $30,000,000])……. 29,600,000
April 1, 2018 (Stillworth)
Investment in bonds (face amount)…………………… 30,000
If the alternate entries are used, entries at the next interest date would require simply a
debit (credit) to interest expense (revenue) for the full interest. The interest accounts
would then reflect the same net debit of five months’ interest.
Problem 14–6 (continued)
Requirement 2
The original maturity of the bonds was three years, or 36 months. But since
the bonds weren’t sold until one month after they were dated, they are
August 31, 2018 (Western)
Interest expense ($1,800,000 + 100,000 – 300,000) . . 1,600,000
August 31, 2018 (Stillworth)
Cash ($30,000 x 12% x 6/12) …………………………….. 1,800
August 31, 2018 (Stillworth)
Problem 14–6 (continued)
December 31, 2018 (Western)
December 31, 2018 (Stillworth)
February 28, 2019 (Western)
Interest expense ($1,800,000 + 40,000 – 1,200,000) . 640,000
February 28, 2019 (Stillworth)
August 31, 2019 (Western)
August 31, 2019 (Stillworth)
December 31, 2019 (Western)
Problem 14–6 (continued)
December 31, 2019 (Stillworth)
February 28, 2020 (Western)
Interest expense ($1,800,000 + 40,000 – 1,200,000) . 640,000
February 28, 2020 (Stillworth)
Cash ($30,000 x 12% x 6/12)……………………………… 1,800
August 31, 2020 (Western)
August 31, 2020 (Stillworth)
December 31, 2020 (Western)
December 31, 2020 (Stillworth)