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1. A company has engaged at contractor to construct a building at a cost of $2,500,000. With available cash of $500,000 the company made a down payment and now needs to borrow the remaining $2,000,000.
The chief financial officer decides to issue $2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.
The company’s accounting policies conform to U.S. generally accepted accounting principles (GAAP) and therefore the effective interest method is used to amortize discounts and premiums on bonds payable.
a. Either manually or using a spreadsheet, prepare bond amortization schedule up to and including January 1, 2020.
Using the attached T-account template, prepare the following entries in T-account format:
b. Issuance of the bonds on January 1, 2016
c. Adjusting journal entry required on December 31, 2016. Assume that no monthly accruals were made during the year ended December 31, 2016.
d. Payment of bond interest on January 1, 2017.
e. Assume that the company redeems half of the bonds by paying the bondholders (creditors) $1,065,000 plus accrued interest. Prepare the journal entry
No. 2 ASSETS LIABILITIES EQUITY Non-current Assets Intangible Assets Other Non-Current Liabilities Accumulated OCI Property, Plant & Current Assets Investments Current Liabilities Contributed CapitalEarned Capital ent
Expert Answer
Bond issue price = [par value * interest % ] * PVIFA (yield rate , N) + Par Value * PVIF (yield rate , N)
= ($2000000 * 10.5%) * PVIFA (10% , 10) + $2000000 * PVIF (10% , 10)
= 210000 * 6.14 + 2000000 * 0.3855 = $2060400 (please refer the Present value of factor & annuity)
Bonds are issued at a premium of $60400
Amortisation of the premium upto Jan 1, 2020 :
| Period | Cash Interest (A) | yield interest (10% of carrying value) (B) | Premium amortised (A-B) | carrying value $ |
| Jan’1, 16 | $2060400 | |||
| Jan’1, 17 | 2000000*10.5% = $210000 | 2060400*10% =206040 | 3960 | 2056440 |
| Jan’1, 18 | 210000 | 2056440*10% = 205644 | 4356 | 2052084 |
| Jan’ 1, 19 | 210000 | 2052084*10% = 205209 | 4791 | 2047293 |
| Jan’1, 20 | 210000 | 2047293*10% = 204730 | 5270 | 2042023 |
As mentioned Journal Entries is required (not the entries in the Accounting Equation format) :
| Date | Accounts Title and explanation | Debit $ | Credit $ |
| Jan 1 16 | Cash | 2060400 | |
| Bonds payable | 2000000 | ||
| Premium on Bonds issue | 60400 | ||
| (issue of bonds at premium) | |||
| Dec 31 16 | Interest Expense | 206040 | |
| Premium on Bond issue | 3960 | ||
| Interest Payable | 210000 | ||
| (interest made due with amortisation of premium) | |||
| Jan 1 17 | Interest Payable | 210000 | |
| Cash | 210000 | ||
As no date of partial redeemption of the Bond is not provided so assumed that the payment is made on Dec 31, 2016. The Journal Entry would be :
| Date | Accounts Title and explanation | Debit $ | Credit $ |
| Dec 31 16 | Bond Payable | 1000000 | |
| Interest expense | 103020 | ||
| Premium on Bonds issue | 30200 | ||
| Loss on redeemption of Bond (balancing figure0 | 36780 | ||
| Cash (1065000 + 105000) | 1170000 | ||
| (being half of the bonds prematurely redeemed at 1065000 + accrued interest and loss on redeemption booked) |
