The following amortization and interest schedule reflects the issuance of 10-yea

Question

The following amortization and interest schedule reflects the issuance of 10-year bonds by Buffalo Corporation on January 1, 2011, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements are prepared once yearly.

Amortization Schedule

Year

Cash

Interest

Amount
Unamortized

Carrying
Value

(a) Indicate whether the bonds were issued at a premium or a discount.

(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method.

(c) Determine the stated interest rate and the effective-interest rate. (Round answers to 0 decimal places, e.g. 18%.)

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2011

(e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2011. (Interest is paid January 1.) (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

December 31, 2011

(f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2018. Buffalo Corporation does not use reversing entries. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

Amortization Schedule

Year

Cash

Interest

Amount
Unamortized

Carrying
Value

1/1/2011 $27,163 $ 108,137 2011 $14,883 $16,221 25,825 109,475 2012 14,883 16,421 24,287 111,013 2013 14,883 16,652 22,518 112,782 2014 14,883 16,917 20,484 114,816 2015 14,883 17,222 18,145 117,155 2016 14,883 17,573 15,455 119,845 2017 14,883 17,977 12,361 122,939 2018 14,883 18,441 8,803 126,497 2019 14,883 18,975 4,711 130,589 2020 14,883 19,594 135,300

Explanation / Answer

Solution a:

As carrying value is increasing gradually as per amortization schedule, therefore bonds were issued at discount.

Solution b:

As interest expense is increasing every year as per amortization schedule, therefore amortization schedule is based on effective interest method.

Solution c:

Stated interest rate = $14,883 / $135,300 = 11%

Effective interest rate = $16,221 / $108,137 = 15%

Solution d:

Solution e:

Solution f:

Journal Entries - Buffalo Corporation Date Particulars Debit Credit 1-Jan-11 Cash Dr $108,137.00 Discount on issue of bond Dr $27,163.00               To Bond Payable $135,300.00 (To record issue of bond at discount)

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