On December 31, 2016, Fett Corporation issued $980,000, 8%, 10-year bonds for $1

Question

On December 31, 2016, Fett Corporation issued $980,000, 8%, 10-year bonds for $1,125,824 cash when the market rate of interest was 6%. The bonds pay interest semi-annually each June 30 and December 31. Fett uses the effective interest amortization method to amortize any premium or discount.

A. Give the set up of the basic bond information. Face Value Stated Rate of Interest Annual Stated Interest Periodic Stated Interest Bond Price (given) Premium or Discount (circle one)

B. Give the general journal entry to record the issue of the bonds on December 31, 2106.

C. Prepare an effective interest amortization table for the first four interest payment date (through December 31, 2018):

Periodic Carrying Stated Effective Value Date Interest Interest Amortization of Bond

D. Give the general journal entries necessary for the first interest payment date, June 30, 2017.

E. Answer the following questions:

1. What amount of interest expense will be reported by Vader on the 2017 income statement?

2. What amount of interest expense will be reported by Vader on the 2018 income statement?

3. What is the total interest expense over the life of the bond?

4. If the straight-line method of amortization had been used, what would be the total interest expense over the life of the bond?

F. Show the balance sheet presentation of the bond liability on December 31, 2018:

Explanation / Answer

A: Bond face value $980,000 rate of interest = 8% Annual stated interest =8% Stated interest = 6% Bond price 1125824 Premium on Bond issued $145,824 B: Debit Cash 1125824 Credit Bond Payable $980,000 Credit Premium on Bond issued $145,824 C: Period Cash interest Interest expense Premium amortised Carrying Value$ 31-Dec-16 1125824 30-Jun-17 39200 33775 5425 1120399 31-Dec-17 39200 33612 5588 1114811 30-Jun-18 39200 33444 5756 1109055 31-Dec-18 39200 33272 5928 1103127 D: Debit Interest Expense 33775 Debit Premium on Bond issued 5425 Credit Cash 39200 E: 1)interest expense will be reported by Vader on the 2017 income statement = 67387 2)interest expense will be reported by Vader on the 2018 income statement = 66716 3) the total interest expense over the life of the bond = 39200*20-145824 638176 4)total interest expense over the life of the bond if straight line amortization= 638176 5) Balance sheet presentation as on 31 dec 2018: Liabilities: Bonds payable $980,000 Premium on Bond issued $123,127(ie.103127-980000)

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