On January 1 2015, Patterson Inc. issued $100,000, 12% bonds for $104,974. The m
ID: 2711843 • Letter: O
Question
On January 1 2015, Patterson Inc. issued $100,000, 12% bonds for $104,974. The market interest rate on January 1, 2015 was 10%. Interest is payable annually on December 31. The maturity date of the bonds is December 31, 2017. Please answer the following questions.
Prepare the premium amortization table from 1/12015 to 12/31/2017.
Prepare the journal entry on December 31, 2015, based on US GAAP and IFRS, respectively.
Prepare bonds section in the 2015 balance sheet, based on US GAAP and IFRS, respectively.
Explanation / Answer
Patterson Inc
Date
Interest paid
Effective interest rate for ANNUAL period
Interest expense
Amortization of premium
Present value of bonds
1/1/2015
$104974
31/12/2015
$12000
10%
$10497
$1503
$103471
31/12/2016
$12000
10%
$10347
$1653
$101818
31/12/2017
$12000
10%
$10182
$1818
$100000
Interest payment Paid annually
= $100,000 x 12%
= $12,000
Effective interest rate = Market interest rate = 10%
Interest expense
= Present value of bonds at the beginning of the period
x Effective interest rate for the period
[1/1/2015 - 31/12/2015] --> $104974 x 10% = $10497
[1/1/2016 - 31/12/2016] --> $103471 x10% = $10347
[1/1/2017 - 31/12/2017] --> $101818 x10% = $10182
Amortization of premium on bonds
= Interest paid - Interest expense
[1/1/2015 -31/12/2015] --> $12000-10497 = $1503
[1/12/2016 - 31/12/2016] --> $12000 - $10347 = $1653
[1/12/2017 - 31/12/2017] --> $12000 - $10182 = $1818
Ending present value of bonds
= Beginning present value of bonds
- Amortization of premium on bonds
[1/1/2015 - 31/12/2015] --> $104974 - $1503 = $103471
[1/1/2016 - 31/12/2016] --> $103471 - $1653 = $101818
[1/1/2017 - 31/12/2017] --> $101818 - $1818 = $100000
As per US GAAP AND IFRS
Bonds are presented on the balance sheet at the present value of future interest and principal payments, which generally equal the cash received by the issuer.
Discounts and premiums on bonds are amortized over the life of the bond using the effective-interest method.
JOURNAL ENTRY ON 2015
CASH A/C DR $1,04,974
TO BONDS PAYABLE $ 1,00,000
TO PREMIUM ON BONDS PAYABLE $ 4,974
INTEREST EXPENSES DR $10,497
PREMIUM ON BONDS PAYABLE DR $ 1503
TO CASH $12,000
Patterson Inc BALANCE SHEET
LONG TERM LIABILITIES
BONDS PAYABLE 1, 00,000
ADD:PREMIUM ON BONDS PAYABLE 4,974 1,04,974
Date
Interest paid
Effective interest rate for ANNUAL period
Interest expense
Amortization of premium
Present value of bonds
1/1/2015
$104974
31/12/2015
$12000
10%
$10497
$1503
$103471
31/12/2016
$12000
10%
$10347
$1653
$101818
31/12/2017
$12000
10%
$10182
$1818
$100000
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