Question

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

a. Shamrock Co. sells $534,000 of 8% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021.
b. 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).

Required:
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.

Answer 1

Answer:

Part a

Payments are done at the beginning of the month therefore, set the financial calculator to the BEG mode.

PV = $534,000

PMT = ($534,000 × 8%) ÷ 2 = $21,360

P/YR = 2

N = 5

YTM = 12 %

FV= $534,000

Journal Entries through December 31, 2021

2020

March 1

Debit : Investment in Bonds $534,000

Credit : Cash $534,000

Recognition of Investment in Bonds

March 1

Debit : Cash $21,360

Debit : Investment in Bonds $21,360

Subsequent measurement of bonds at amortized cost

September 1

Debit : Cash $21,360

Debit : Investment in Bonds $9,398

Credit : Effective Interest Income $30,758

Subsequent measurement of bonds at amortized cost

2021

March 1

Debit : Cash $21,360

Debit : Investment in Bonds $9,962

Credit : Effective Interest Income $31,322

Subsequent measurement of bonds at amortized cost

September 1

Debit : Cash $21,360

Debit : Investment in Bonds $10,560

Credit : Effective Interest Income $31,920

Subsequent measurement of bonds at amortized cost

Part b

Payments are done at the beginning of the month therefore, set the financial calculator to the BEG mode.

PV =  $400,000

PMT = ($400,000 × 12%) ÷ 2 = $24,000

P/YR = 2

N = 8

YTM = 10%

FV = $400,000

        Bond amortization schedule using the effective-interest method

Date         Cashflow    Effective Int   Capital Repmts  Diff         Gross CAmt

2017

1 June     -$400,000                                                                       $400,000

1 June        $24,000       $0                    $0              -$24,000      $376,000

1 Dec          $24,000    $18,800              $0                -$5,200      $370,800

2018

1 June        $24,000    $18,540               $0               -$5,460      $365,340

1 Oct         $126,000    $18,267               $0              - 107,733      $257,607