Concept explainers
a.
Prepare an amortization table.
a.
Explanation of Solution
Amortization Schedule:
A schedule that gives the detail about each loan payment and shows the allocation of principal and interest over the life of the note, or bond is called amortization schedule.
Amortization table is prepared as follows:
Amortization Table for Bonds Premium | ||||
Date | Cash Payment ($) | Interest Expense ($) | Premium Amortization ($) |
Carrying Value ($) |
January 1, 2018 | 124,920 | |||
December 31, 2018 | 9,600 (1) | 8,744 (2) | 856 (3) | 124,064 (4) |
December 31, 2019 | 9,600 (1) | 8,684 (5) | 916 (6) | 123,148 (7) |
December 31, 2020 | 9,600 (1) | 8,620 (8) | 980 (9) | 122,168 (10) |
December 31, 2021 | 9,600 (1) | 8,552 (11) | 1,048 (9) | 121,120 (13) |
December 31, 2022 | 9,600 (1) | 8,480 (14) | 1,120 (15) | 120,000 (16) |
Totals | 48,000 | 43,080 | 4,920 |
Table (1)
Working notes:
Working note 1:
Calculate the cash payment from 2018 to 2022.
Working note 2:
Calculate the interest Expense as on December 31, 2018:
Working note 3:
Calculate the premium amortization as on December 31, 2018:
Working note 4:
Calculate the carrying
Working note 5:
Calculate the interest Expense as on December 31, 2019:
Working note 6:
Calculate the premium amortization as on December 31, 2019:
Working note 7:
Calculate the carrying value of bond as on December 31, 2019:
Working note 8:
Calculate the interest Expense as on December 31, 2020:
Working note 9:
Calculate the premium amortization as on December 31, 2020:
Working note 10:
Calculate the carrying value of bond as on December 31, 2020:
Working note 11:
Calculate the interest Expense as on December 31, 2021:
Working note 12:
Calculate the premium amortization as on December 31, 2021:
Working note 13:
Calculate the carrying value of bond as on December 31, 2021:
Working note 14:
Calculate the interest Expense as on December 31, 2022:
Note: $8,478.4 rounded to $10,597.
Working note 15:
Calculate the premium amortization as on December 31, 2022:
Working note 16:
Calculate the carrying value of bond as on December 31, 2022:
b.
State the item that would appear on the Balance sheet of 2020.
b.
Explanation of Solution
Balance sheet: Balance sheet is the financial statement that reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and
- The item that would appear on the Balance sheet of 2020 is the carrying value of bond liability. The premium amount is included while, reporting the carrying value ($122,168).
- The face value of the bond and the premium received on bond is disclosed in the notes to the financial statements. Alternatively, the face value plus the premium could be shown in the following way:
Particulars | Amount ($) |
Bond liability | 120,000 |
Add: Bond Premium (17) | 2,168 |
Carrying value | 122,168 |
Table (2)
Working note 17:
Calculate the total premium on bond:
c.
State the item that would appear on the income statement of 2020.
c.
Explanation of Solution
Income statement: Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.
The statement of income will report interest expense of $8,620.
d.
State the item that would appear on the statement of
d.
Explanation of Solution
Statement of cash flows: Statement of cash flows is one among the financial statement of a Company statement that shows aggregate data of all
The cash flow statement will report
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Chapter 7 Solutions
Survey Of Accounting
- Wilbury Corporation issued 1 million of 13.5% bonds for 985,071.68. The bonds are dated and issued October 1, 2019, are due September 30, 2020, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%. Required: 1. Prepare a bond interest expense and discount amortization schedule using the straight-line method. 2. Prepare a bond interest expense and discount amortization schedule using the effective interest method. 3. Prepare adjusting entries for the end of the fiscal year December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. If income before interest and income taxes of 30% in 2020 is 500,000, compute net income under each alternative. 5. Assume the company retired the bonds on June 30, 2020, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight line method of amortization b. effective interest method of amortization 6. Compute the companys times interest earned (pretax operating income divided by interest expense) for 2020 under each alternative.arrow_forwardBrief ExerciseBonds Issued at a Premium (Effective Interest) Refer to the information above for Haley Industries. Required: Prepare the journal entry for December 31, 2022 and 2023. Use the following information for Brief Exercises 9-55 and 9-58: Haley Industries issued $120,000 of 11% , 7-year bonds on January 1, 2020, with $5,842 pre- mium. Interest is paid annually on December 31. The market rate of interest is 10%.arrow_forwardMASTERY PROBLEM Jackson, Inc.s fiscal year ends December 31. Selected transactions for the period 20-1 through 20-8 involving bonds payable issued by Jackson are as follows: 20-1 Oct. 31 Issued 600,000 of 10-year, 7%, callable bonds dated October 31, 20-1, for 612,000. Interest is payable semiannually on October 31 and April 30. The bond indenture provides that Jackson is to pay to the trustee bank 20,000 by May 15 of each year (except the tenth year) as a sinking fund for the retirement of the bonds on call or at maturity. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds (straight-line method). 20-2 Jan. 2 Reversed the adjusting entry for interest payable and bond premium amortization. Apr. 30 Paid the semiannual interest on the bonds and amortized six months premium. May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds. 31 Sinking fund earnings for the year were 900. 20-8 May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. 31 Redeemed the bonds, which were called at 97. The balance in the bond premium account is 3,600 after the payment of interest and amortization of premium have been entered. The cash balance in the sinking fund is 200,000, which is applied to the redemption. Jackson paid the sinking fund trustee the additional cash needed to pay off the bonds. (Hint: First make the entry for payment to the sinking fund, then make the entry for redemption of the bonds.) REQUIRED 1. Enter the preceding transactions in general journal form. 2. Calculate the carrying value of the bonds as of December 31, 20-2.arrow_forward
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