Chapter 2 Problem 1 1. Bond computations: Straight-line amortization Southlake C

Question

Chapter 2 Problem 1

1. Bond computations: Straight-line amortization

Southlake Corporation issued $900,000 of 8% bonds on March 1,

20X1. The bonds pay interest on March 1 and September 1 and mature

in 10 years. Assume the independent cases that follow.

• Case A—The bonds are issued at 100.

• Case B—The bonds are issued at 96.

• Case C—The bonds are issued at 105.

Southlake uses the straight-line method of

amortization.

Instructions:

Complete the following table:

Case A Case B Case C

a. Cash inflow on the issuance date _______ _______ _______

b. Total cash outflow through maturity _______ _______

_______

c. Total borrowing cost over the life of the bond issue _______

_______ _______

d. Interest expense for the year ended December 31, 20X1 _______

_______ _______

e. Amortization for the year ended December 31, 20X1 _______

_______ _______

f. Unamortized premium as of December 31, 20X1 _______ _______

_______

g. Unamortized discount as of December 31, 20X1 _______ _______

_______

h. Bond carrying value as of December 31, 20X1 _______ _______

_______

Chapter 3 Exercise 1

1. Product costs

Explanation / Answer

ANSWER

.Prepare the January 1, 2009, journal entry to record the bonds' issuance

Debit Cash $2,160,000
Debit Bond Discount $340,000
Credit Bonds Payable $2,500,000

2.For each semiannual period, compute the following: Cash payment, Straight-line discount amortization, Bond interest expense

Bond Interest Expense - $98,833.33 - calculated as $11,333.33 + $87,500
Straight Line Discount Amortization = $11,333.33 - calculated as $340,000 / 15 / 2
Cash payment = $87,500 - calculated as $2,500,000 X 7% / 2

3.Determine the total bond interest expense to be recognized over the bonds' life: Total bond interest expense

($2,500,000 X 7% X 15) + $340,000 = $2,965,000

4. Use the straight-line method to amortize the discount for these bonds: Unamortized Discount, Carrying Value for: 1/01/2009, 6/30/2009, 12/31/2009, 6/30/2010, 12/31/2010

1/01/2009
Unamortized Discount = $340,000
Carrying Value = $2,160,000.00

6/30/2009
Unamortized Discount = $328,666.67
Carrying Value = $2,171,333.33

12/31/2009
Unamortized Discount = $317,333.33
Carrying Value = $2,182,666.67


6/30/2010
Unamortized Discount = $306,000.00
Carrying Value = $2,194,000.00

12/31/2010
Unamortized Discount = $294,666.67
Carrying Value = $2,205,333.33


5. Prepare the journal entries to record the first two interest payments: June 30 2009, Dec. 31 2009

They're both the same:

Debit Interest Expense - $98,833.33 - calculated as $11,333.33 + $87,500
Credit Bond Discount $11,333.33 - calculated as $340,000 / 15 / 2
Credit Cash $87,500 - calculated as $2,500,000 X 7% / 2


------For the second part: Assume that the bonds are issued at a price of $3,060,000: "Parts 1 - 5"

1.Prepare the January 1, 2009, journal entry to record the bonds' issuance

Debit Cash $3,060,000
Credit Bond Premium $560,000
Credit Bonds Payable $2,500,000

2.For each semiannual period, compute the following: Cash payment, Straight-line discount amortization, Bond interest expense

Bond Interest Expense - $68,833.33 - calculated as $87,500 - $18,666.67
Straight Line Premium Amortization = $18,666.67 - calculated as $560,000 / 15 / 2
Cash payment = $87,500 - calculated as $2,500,000 X 7% / 2

3.Determine the total bond interest expense to be recognized over the bonds' life: Total bond interest expense

($2,500,000 X 7% X 15) - $560,000 = $2,065,000

4. Use the straight-line method to amortize the discount for these bonds: Unamortized Discount, Carrying Value for: 1/01/2009, 6/30/2009, 12/31/2009, 6/30/2010, 12/31/2010

1/01/2009
Unamortized Discount = $560,000.00
Carrying Value = $3,060,000.00

6/30/2009
Unamortized Discount = $541,333.33
Carrying Value = $3,041,333.33

12/31/2009
Unamortized Discount = $522,666.67
Carrying Value = $3,022,666.67

6/30/2010
Unamortized Discount = $504,000.00
Carrying Value = $3,004,000.00

12/31/2010
Unamortized Discount = $485,333.33
Carrying Value = $2,985,333.33


5. Prepare the journal entries to record the first two interest payments: June 30 2009, Dec. 31 2009

They're both the same:

Debit Interest Expense - $68,833.33 - calculated as $87,500 - $18,666.67
Debit Bond Premium $18,666.67 - calculated as $560,000 / 15 / 2
Credit Cash $87,500 - calculated as $2,500,000 X 7% / 2
Source(s):
35 years of accounting experience.Prepare the January 1, 2009, journal entry to record the bonds' issuance

Debit Cash $2,160,000
Debit Bond Discount $340,000
Credit Bonds Payable $2,500,000

2.For each semiannual period, compute the following: Cash payment, Straight-line discount amortization, Bond interest expense

Bond Interest Expense - $98,833.33 - calculated as $11,333.33 + $87,500
Straight Line Discount Amortization = $11,333.33 - calculated as $340,000 / 15 / 2
Cash payment = $87,500 - calculated as $2,500,000 X 7% / 2

3.Determine the total bond interest expense to be recognized over the bonds' life: Total bond interest expense

($2,500,000 X 7% X 15) + $340,000 = $2,965,000

4. Use the straight-line method to amortize the discount for these bonds: Unamortized Discount, Carrying Value for: 1/01/2009, 6/30/2009, 12/31/2009, 6/30/2010, 12/31/2010

1/01/2009
Unamortized Discount = $340,000
Carrying Value = $2,160,000.00

6/30/2009
Unamortized Discount = $328,666.67
Carrying Value = $2,171,333.33

12/31/2009
Unamortized Discount = $317,333.33
Carrying Value = $2,182,666.67


6/30/2010
Unamortized Discount = $306,000.00
Carrying Value = $2,194,000.00

12/31/2010
Unamortized Discount = $294,666.67
Carrying Value = $2,205,333.33


5. Prepare the journal entries to record the first two interest payments: June 30 2009, Dec. 31 2009

They're both the same:

Debit Interest Expense - $98,833.33 - calculated as $11,333.33 + $87,500
Credit Bond Discount $11,333.33 - calculated as $340,000 / 15 / 2
Credit Cash $87,500 - calculated as $2,500,000 X 7% / 2


------For the second part: Assume that the bonds are issued at a price of $3,060,000: "Parts 1 - 5"

1.Prepare the January 1, 2009, journal entry to record the bonds' issuance

Debit Cash $3,060,000
Credit Bond Premium $560,000
Credit Bonds Payable $2,500,000

2.For each semiannual period, compute the following: Cash payment, Straight-line discount amortization, Bond interest expense

Bond Interest Expense - $68,833.33 - calculated as $87,500 - $18,666.67
Straight Line Premium Amortization = $18,666.67 - calculated as $560,000 / 15 / 2
Cash payment = $87,500 - calculated as $2,500,000 X 7% / 2

3.Determine the total bond interest expense to be recognized over the bonds' life: Total bond interest expense

($2,500,000 X 7% X 15) - $560,000 = $2,065,000

4. Use the straight-line method to amortize the discount for these bonds: Unamortized Discount, Carrying Value for: 1/01/2009, 6/30/2009, 12/31/2009, 6/30/2010, 12/31/2010

1/01/2009
Unamortized Discount = $560,000.00
Carrying Value = $3,060,000.00

6/30/2009
Unamortized Discount = $541,333.33
Carrying Value = $3,041,333.33

12/31/2009
Unamortized Discount = $522,666.67
Carrying Value = $3,022,666.67

6/30/2010
Unamortized Discount = $504,000.00
Carrying Value = $3,004,000.00

12/31/2010
Unamortized Discount = $485,333.33
Carrying Value = $2,985,333.33


5. Prepare the journal entries to record the first two interest payments: June 30 2009, Dec. 31 2009

They're both the same:

Debit Interest Expense - $68,833.33 - calculated as $87,500 - $18,666.67
Debit Bond Premium $18,666.67 - calculated as $560,000 / 15 / 2
Credit Cash $87,500 - calculated as $2,500,000 X 7% / 2
Source(s):
35 years of accounting experience

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