Question

In each of the following independent cases the company closes its books on December 31.

1.Sanford Co. sells $500,000 of 10% bonds on March 1, 2014. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2017. The bonds yield 12%. Give entries through December 31, 2015.

2. Titania Co. sells $400,000 of 12% bonds on June 1, 2014. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2018. The bonds yield 10%. On October 1, 2015, Titania buys back $120,000 worth of bonds for $126,000 (includes accrued interest). Give entries through December 1, 2016.

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Answer 1

Answer:

cash                  472,088   debit

discount on BP    27,912  debit

   bonds payable         500,000 credit

--to record issuance--

interest expense 28325.29

discount on BP 3325.29

cash              25000

--to record first interest payment

interest expense  19,016.53

discount on BP 2,349.86

interest payable   16,666.67

--to record accrued interest Dec 31th--

Titania:

Cash   532,316.06

  Bonds payable    500,000

  Premium on BP     32,316.06

--to record issuance--

interest expense 26615.8

Premium on BP        3384.2

cash                     30000

--first interest payment--

interest expense 4,407.77

Premium on BP        592.23

interest payable     5,000

--to record accrued interest Dec 31th--

Explanation:

Sanford Co.

Present value at market rate:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 25,000.000

time 7

rate 0.06

$25000 \times \frac{1-(1+0.06)^{-7} }{0.06} = PV$

PV $139,559.5360

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   500,000.00

time   7.00

rate  0.06

$\frac{500000}{(1 + 0.06)^{7} } = PV$  

PV   332,528.56

PV c $139,559.5360

PV m  $332,528.5568

Total $472,088.0928

then, we solve for the first interest payment

carrying value x market rate

472,088.09 x 0.06 = 28325.29

we compare with the cash outlay and solve for the amortization

28,325.29 - 25,000 = 3,325.29

At year-end we also solve for the accrued interest

(472,088.09 + 3,325.29) x 0.06 x 4/6 = 19,016.53

accured payable:

500,000 x 5% x 4/6 = 16,666.67

amortization 19,016.53 - 16,666.67 = 2,349.86

Titania

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 30,000.000

time 8

rate 0.05

$30000 \times \frac{1-(1+0.05)^{-8} }{0.05} = PV$

PV $193,896.3828

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   500,000.00

time   8.00

rate  0.05

$\frac{500000}{(1 + 0.05)^{8} } = PV$  

PV   338,419.68

PV c $193,896.3828

PV m  $338,419.6810

Total $532,316.0638

interest first payment:

532,316.06 x 0.05 = 26615.8

then, compare wit hteh cash outlay of 30,000

30,000 - 26,615.8 = 3384.2

accrued interest:

(532,316.06 - 3,384.2) X 0.05 x 1/6 = 4,407.77

payable 30,000 x 1/6 = 5,000

amoritzation 5000 - 4,407.77 = 592.23