Question

In each of the following independent cases, the company closes its books on December 31.

a. Shamrock Co. sells $534,000 of 8% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021.
b. Titania Co. sells $400,000 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 10%. On October 1, 2018, Titania buys back $120,000 worth of bonds for $126,000 (includes accrued interest).

Required:
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.

Answer 1

Part a

Payments are done at the beginning of the month therefore, set the financial calculator to the BEG mode.

PV = $534,000

PMT = ($534,000 × 8%) ÷ 2 = $21,360

P/YR = 2

N = 5

YTM = 12 %

FV= $534,000

Journal Entries through December 31, 2021

2020

March 1

Debit : Investment in Bonds $534,000

Credit : Cash $534,000

Recognition of Investment in Bonds

March 1

Debit : Cash $21,360

Debit : Investment in Bonds $21,360

Subsequent measurement of bonds at amortized cost

September 1

Debit : Cash $21,360

Debit : Investment in Bonds $9,398

Credit : Effective Interest Income $30,758

Subsequent measurement of bonds at amortized cost

2021

March 1

Debit : Cash $21,360

Debit : Investment in Bonds $9,962

Credit : Effective Interest Income $31,322

Subsequent measurement of bonds at amortized cost

September 1

Debit : Cash $21,360

Debit : Investment in Bonds $10,560

Credit : Effective Interest Income $31,920

Subsequent measurement of bonds at amortized cost

Part b

Payments are done at the beginning of the month therefore, set the financial calculator to the BEG mode.

PV = $400,000

PMT = ($400,000 × 12%) ÷ 2 = $24,000

P/YR = 2

N = 8

YTM = 10%

FV = $400,000

Bond amortization schedule using the effective-interest method

Date Cashflow Effective Int Capital Repmts Diff Gross CAmt

2017

1 June -$400,000 $400,000

1 June $24,000 $0 $0 -$24,000 $376,000

1 Dec $24,000 $18,800 $0 -$5,200 $370,800

2018

1 June $24,000 $18,540 $0 -$5,460 $365,340

1 Oct $126,000 $18,267 $0 - 107,733 $257,607