Flower Garden issued $8,000,000 of 8% debentures bonds on Jan 1, 2014 and receiv
ID: 2460159 • Letter: F
Question
Flower Garden issued $8,000,000 of 8% debentures bonds on Jan 1, 2014 and received cash totaling $7,098,102. The bonds which are due in 10 years pay interest semiannually on July 1 and Jan 1. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%. Instructions: Show your computations on this word document to receive credit
a. Prepare schedule of interest and discount amortization during the first two years these bonds were outstanding. (Show computations and round to the nearest dollar.).
b. Prepare January 1, 2014 issuance
c. Prepare July 1 2014 interest payment Prepare the December 31st 2014 adjusting entry
Explanation / Answer
Face value of Debentures = $8,000,000.
Cash received =$7,098,102.
Discount on issue of bonds =$8,000,000 - $7,098,102.
=$901,898.
Interest payment = Semi annual.
Semi annual interest payment =$8,000,000 *8%/2 =$320,000.----------(A)
Effective interes rate =10%. Semi annual effective interest rate=5%.
Effective interest = $7,098,102*5%
=$354,905.10.---------------(B)
Interest to be ammortized from bond discount account=(A) - (B)=$34,905.10.
Undermentioned is the table that contains bond discount ammortiztion:
Answer for question no.b:
Journal entry for issue of debentures is as follows:
Answer for question no.c:
Interest payment Nominal interest (A) Effective interest (B) Balance to be ammortized from Bond discount (C ) =(B) - (A) Balance bond discount (D) =(D)- (C ) Book value of the bonds (E )= (E )+(C ) 1-Jan-04 $901,898 $7,098,102 1-Jul-14 $320,000 $354,905 $34,905 $866,993 $7,133,007 31-Dec-14 $320,000 $356,650 $36,650 $830,343 $7,169,657 7/1/2015 $320,000 $358,483 $38,483 $791,860 $7,208,140 12/31/2015 $320,000 $360,407 $40,407 $751,453 $7,248,547Related Questions
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