Exercise 10-22 Cole Corporation issued $407,000, 8%, 23-year bonds on January 1,
ID: 2451367 • Letter: E
Question
Exercise 10-22
Cole Corporation issued $407,000, 8%, 23-year bonds on January 1, 2014, for $368,007. This price resulted in an effective-interest rate of 9% on the bonds. Interest is payable annually on January 1. Cole uses the effective-interest method to amortize bond premium or discount.
Interest
Periods
Interest to
Be Paid
Interest Expense
to Be Recorded
Discount
Amortization
Unamortized
Discount
Bond
Carrying Value
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2014
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2014
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2015
Exercise 10-22
Cole Corporation issued $407,000, 8%, 23-year bonds on January 1, 2014, for $368,007. This price resulted in an effective-interest rate of 9% on the bonds. Interest is payable annually on January 1. Cole uses the effective-interest method to amortize bond premium or discount.
Explanation / Answer
Amortization schedule using effective-interest method:
Interest
Interest to
Interest Expense
Discount
Unamortized
Bond
Periods
Be Paid
to Be Recorded
Amortization
Discount
Carrying Value
A
B
C
D=B-C
E=E-D
F = 407000-E
Jan. 1, 2014
$ 38,993.00
$ 368,007.00
(407000-368007)
Dec. 31, 2014
$ 32,560.00
$ 33,120.63
$ 560.63
$ 38,432.37
$ 368,567.63
(407000*8%)
(368007*9%)
Dec. 31, 2015
$ 32,560.00
$ 33,171.09
$ 611.09
$ 37,821.28
$ 369,178.72
(407000*8%)
(368567.63*9%)
Journal entries to record the issuance of the bonds:
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2014
Cash
$ 368,007.00
Discount on Issue of Bonds
$ 38,993.00
Bonds Payable
$ 407,000.00
(Being bonds issued on discount)
Journal entries to record the accrual of interest and the discount amortization on December 31, 2014.
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2014
Interest Expense
$ 33,120.63
Discount on Issue of Bonds
$ 560.63
Interest Payable
$ 32,560.00
(Being Interest Expense accrued)
Journal entries to record the payment of interest on January 1, 2015
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2014
Interest Payable
$ 32,560.00
Cash
$ 32,560.00
(Being Interest paid in cash)
Amortization schedule using effective-interest method:
Interest
Interest to
Interest Expense
Discount
Unamortized
Bond
Periods
Be Paid
to Be Recorded
Amortization
Discount
Carrying Value
A
B
C
D=B-C
E=E-D
F = 407000-E
Jan. 1, 2014
$ 38,993.00
$ 368,007.00
(407000-368007)
Dec. 31, 2014
$ 32,560.00
$ 33,120.63
$ 560.63
$ 38,432.37
$ 368,567.63
(407000*8%)
(368007*9%)
Dec. 31, 2015
$ 32,560.00
$ 33,171.09
$ 611.09
$ 37,821.28
$ 369,178.72
(407000*8%)
(368567.63*9%)
Journal entries to record the issuance of the bonds:
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2014
Cash
$ 368,007.00
Discount on Issue of Bonds
$ 38,993.00
Bonds Payable
$ 407,000.00
(Being bonds issued on discount)
Journal entries to record the accrual of interest and the discount amortization on December 31, 2014.
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2014
Interest Expense
$ 33,120.63
Discount on Issue of Bonds
$ 560.63
Interest Payable
$ 32,560.00
(Being Interest Expense accrued)
Journal entries to record the payment of interest on January 1, 2015
Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2014
Interest Payable
$ 32,560.00
Cash
$ 32,560.00
(Being Interest paid in cash)
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