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 Capulet Corporation on January 1, 2008, 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. 38,548.)

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2008.

(e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2008. (Interest is paid January 1.)

(f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2015. Capulet Corporation does not use reversing entries.

Amortization Schedule

Year

Cash

Interest

Amount
Unamortized

Carrying
Value

1/1/2008 $5,651 $ 94,349 2008 $11,000 $11,322 5,329 94,671 2009 11,000 11,361 4,968 95,032 2010 11,000 11,404 4,564 95,436 2011 11,000 11,452 4,112 95,888 2012 11,000 11,507 3,605 96,395 2013 11,000 11,567 3,038 96,962 2014 11,000 11,635 2,403 97,597 2015 11,000 11,712 1,691 98,309 2016 11,000 11,797 894 99,106 2017 11,000 11,894 100,000

Explanation / Answer

The solution is as follows:

Face(stated) rate =11,000/100,000=.11 or 11%
Effective(market) rate=11,322/94349=.12 or 12%
bonds issued(sold) at discount
Cash                                 94,349 debit
Discount on Bonds Payable 5,651(debit)
Bonds Payable                                       100000credit

Interest payment
Bonds Interest Exp                 11,712 debit
Disc on Bonds Pay    712 credit
Cash                                                      11,000 credit

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