In each of the following independent cases, the company closes its books on Dece

Question

In each of the following independent cases, the company closes its books on December 31. Bridgeport Co. sells $491,000 of 8% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)

b-Prepare all of the relevant journal entries from the time of sale until the date indicated. (Assume that no reversing entries were made.)

c-Indigo Co. sells $440,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 8%. On October 1, 2018, Indigo buys back $140,800 worth of bonds for $147,800 (includes accrued interest).

Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)

Difference due to rounding

d-Prepare all of the relevant journal entries from the time of sale until the date indicated. Give entries through December 1, 2019. (Assume that no reversing entries were made.)

Explanation / Answer

a. Computation of discount: Interest payment=491000*8%*1/2=19640 Present value of interest payment for 7 semi-annual payments @ 6%=19640*5.582381=109638 Present value of repayment of bond on maturiy at 7th semi-annual period at 6%=491000*0.665057= 326543 Proceeds from sale of bond=109638+326543=436181 Discount on sale of bond=491000-436181=54819 Bond amortization schedule: A B C D E F G Date Interest payment Interest expense Amortization of discount Balance in bond Discount Balance in bond payable Book value of bonds (Fce value * 8%*1/2) (previous value in G*12%*1/2) [C-B] (previous value in E-D) [F-E] 3/1/2017 54819 491000 436181 9/1/2017 19640 26171 6531 48288 491000 442712 3/1/2018 19640 26563 6923 41365 491000 449635 9/1/2018 19640 26978 7338 34027 491000 456973 3/1/2019 19640 27418 7778 26249 491000 464751 9/1/2019 19640 27885 8245 18004 491000 472996 3/1/2020 19640 28380 8740 9264 491000 481736 9/1/2020 19640 28904 9264 0 491000 491000 b. Date Account titles and explanation Debit Credit 3/1/2017 Cash 436181 Discount on bonds payable 54819 Bond payable 491000 (Sale of 8% bond at discount) 9/1/2017 Interest expense 26171 Discount on bonds payable 6531 Cash 19640 (Semi-annual interest payment paid) 12/31/2017 Interest expense (26563*4/6) 17709 Discount on bonds payable 4615 Interest payable (19640*4/6) 13093 (Interest payment due) 3/1/2018 Interest expense (26563*2/6) 8854 Interest payable 13093 Discount on bonds payable (6923*2/6) 2308 Cash 19640 (Semi-annual interest payment paid) 9/1/2018 Interest expense 26978 Discount on bonds payable 7338 Cash 19640 (Semi-annual interest payment paid) 12/31/2018 Interest expense (27418*4/6) 18279 Discount on bonds payable 5185 Interest payable (19640*4/6) 13093 (Interest payment due) 3/1/2019 Interest expense (27418*2/6) 9139 Interest payable 13093 Discount on bonds payable (7778*2/6) 2593 Cash 19640 (Semi-annual interest payment paid) 9/1/2019 Interest expense 27885 Discount on bonds payable 8245 Cash 19640 (Semi-annual interest payment paid) 12/31/2019 Interest expense (28380*4/6) 18920 Discount on bonds payable 5827 Interest payable (19640*4/6) 13093 (Interest payment due) 3/1/2020 Interest expense (28380*2/6) 9460 Interest payable 13093 Discount on bonds payable 2913 Cash 19640 (Semi-annual interest payment paid) 9/1/2020 Interest expense 28904 Discount on bonds payable 9264 Cash 19640 (Semi-annual interest payment paid) 9/1/2020 Bond payable 491000 Cash 491000 (Repayment of bond at maturity) c. Computation of premium: Interest payment=440000*12%*1/2=26400 Present value of interest payment for 8 semi-annual payments @ 4%=26400*6.732745=177745 Present value of repayment of bond on maturiy at 8th semi-annual period at 4%=440000*0.73069= 321504 Proceeds from sale of bond=177745+321504=499249 Premium on sale of bond=499249-440000=59249 Bond amortization schedule: A B C D E F G Date Interest payment Interest expense Amortization of premium Balance in bond premium Balance in bond payable Book value of bonds (Fce value * 12%*1/2) (previous value in G*8%*1/2) [B-C] (previous value in E-D) [F+E] 6/1/2017 59249 440000 499249 12/1/2017 26400 19970 6430 52819 440000 492819 6/1/2018 26400 19713 6687 46132 440000 486132 12/1/2018 26400 19445 6955 39177 440000 479177 6/1/2019 26400 19167 7233 31944 440000 471944 12/1/2019 26400 18878 7522 24422 440000 464422 6/1/2020 26400 18577 7823 16599 440000 456599 12/1/2020 26400 18264 8136 8463 440000 448463 6/1/2021 26400 17939 8461 1 440000 440001 * Difference of 1 is due to round off d. Date Account titles and explanation Debit Credit 6/1/2017 Cash 499249 Premium on bonds payable 59249 Bond payable 440000 (Sale of 12% bond at premium) 12/1/2017 Interest expense 19970 Premium on bonds payable 6430 Cash 26400 (Semi-annual interest payment paid) 12/31/2017 Interest expense (19713*1/6) 3286 Premium on bonds payable 1115 Interest payable (26400*1/6) 4400 (Interest payment due) 6/1/2018 Interest expense (19713*5/6) 16428 Interest payable 4400 Premium on bonds payable 5573 Cash 26400 (Semi-annual interest payment paid) 10/1/2018 Interest expense (19445*0.32*4/6) 4148 Premium on bonds payable 1484 Cash (140800*12%*4/12) 5632 (interest paid on buyback) 10/1/2018 Bond payable 140800 Premium on bonds payable 13278 Gain on redemption of bonds 11910 Cash 142168 (Buyback of bonds) 12/1/2018 Interest expense (19445*0.68) 13223 Premium on bonds payable 4729 Cash (26400*0.68) 17952 (Semi-annual interest payment paid) 12/31/2018 Interest expense (19167*0.68*1/6) 2172 Premium on bonds payable 820 Interest payable (26400*0.68*1/6) 2992 (Interest payment due) 6/1/2019 Interest expense (19167*0.68*5/6) 10861 Interest payable 2992 Premium on bonds payable 4099 Cash (26400*0.68) 17952 (Semi-annual interest payment paid) 12/1/2019 Interest expense (18878*0.68) 12837 Premium on bonds payable 5115 Cash 17952 (Semi-annual interest payment paid) 12/31/2019 Interest expense (18577*0.68*1/6) 2105 Premium on bonds payable 887 Interest payable (26400*0.68*1/6) 2992 (Interest payment due) Note: 1. Buy back of bonds: Ratio of bonds bought back=140800/440000=0.32 Segregation of interest and principal from consideration paid Interest for 4 months=140800*12%*4/12=5632 Principal part in the consideration=147800-5632=142168 Re-acquisition price 142168 Net carriying amount of bond Par value 140800 Unamortized premium [0.32*46132]-1484 13278 154078 Gain on redemption 11910

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