E14-4

(Entries

for Bond TransactionsStraight-Line)

Foreman Company issued $800,000 of 10%, 20-year
bonds on January 1, 2011, at 102. Interest is
payable semiannually on July 1 and January 1.
Foreman Company uses the straight-line method of
amortization for bond premium or discount.

Instructions

Prepare the journal entries to record the following.

(a) The issuance of the bonds.
(b) The payment of interest and the related
amortization on July 1, 2011.
(c) The accrual of interest and the related
amortization on December 31, 2011.

EXERCISE 14-4 (1520 minutes)

(a)

(b)

(c)

1/1/11

Cash ($800,000 X 102%)...........................

Bonds Payable................................
Premium on Bonds
Payable..........................................

816,000

Interest Expense.......................................
Premium on Bonds Payable
($16,000 40).........................................
Cash
($800,000 X 10% X 6/12)...............

39,600

12/31/11 Interest Expense.......................................

Premium on Bonds Payable....................
Interest Payable...............................

39,600
400

7/1/11

800,000
16,000

400
40,000

40,000

E14-(Amortization
6

SchedulesStraight-Line) Spencer
Company sells 10% bonds having a maturity value
of $3,000,000 for $2,783,724. The bonds are
dated January 1, 2010, and mature January 1,
2015. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount

amortization under the straight-line method.
E14-(Amortization ScheduleEffective-Interest) Assume the same
7 information as E14-6.

Instructions

Set up a schedule of interest expense and discount

amortization under the effective-interest method.
(Hint: The effective interest rate must be computed.)

EXERCISE 14-6 (1520 minutes)

Schedule of Discount Amortization
Straight-Line Method

Year
Jan. 1, 2010
Dec. 31, 2010
Dec. 31, 2011
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014

Cash
Paid
$300,000
300,000
300,000
300,000
300,000

Interest
Expense
$343,255.20
343,255.20
343,255.20
343,255.20
343,255.20

*$43,255.20 = ($3,000,000 $2,783,724) 5.

Discount
Amortized
$43,255.20*
43,255.20
43,255.20
43,255.20
43,255.20

Carrying
Amount of
Bonds
$2,783,724.00
2,826,979.20
2,870,234.40
2,913,489.60
2,956,744.80
3,000,000.00

EXERCISE 14-7 (1520 minutes)

The effective-interest or yield rate is 12%. It is determined
through trial and error using Table 6-2 for the discounted value
of the principal ($1,702,290) and Table 6-4 for the discounted value
of the interest ($1,081,434); $1,702,290 plus $1,081,434 equals the
proceeds of $2,783,724. (A financial calculator may be used to
determine the rate of 12%.)

Schedule of Discount Amortization

Effective-Interest Method (12%)

Year
(1)
Jan. 1, 2010

Cash
Paid

Interest
Expense

Discount
Amortized

(2)

(3)

(4)

Carrying
Amount of
Bonds
$2,783,724.00

Dec. 31, 2010

$300,000

$334,046.88*

$34,046.88

2,817,770.88

Dec. 31, 2011

300,000

338,132.51

38,132.51

2,855,903.39

Dec. 31, 2012

300,000

342,708.41

42,708.41

2,898,611.80

Dec. 31, 2013

300,000

347,833.42

47,833.42

2,946,445.22

Dec. 31, 2014

300,000

353,554.78**

53,554.78

3,000,000.00

*$334,046.88 = $2,783,724 X .12.

**Rounded.

E14-(Entry
12

for Retirement of Bond; Bond Issue Costs)

On January 2, 2005, Prebish Corporation issued
$1,500,000 of 10% bonds at 97 due December 31,
2014. Legal and other costs of $24,000 were
incurred in connection with the issue. Interest on
the bonds is payable annually each December 31.
The $24,000 issue costs are being deferred and
amortized on a straight-line basis over the 10year term of the bonds. The discount on the
bonds is also being amortized on a straight-line
basis over the 10 years. (Straight-line is not
materially different in effect from the preferable
interest method.)
The bonds are callable at 101 (i.e., at 101% of
face amount), and on January 2, 2010, Prebish
called $1,000,000 face amount of the bonds and
retired them.

Instructions

Ignoring income taxes, compute the amount of loss, if

any, to be recognized by Prebish as a result of
retiring the $1,000,000 of bonds in 2010 and prepare
the journal entry to record the retirement.

EXERCISE 14-12 (1520 minutes)

Reacquisition price ($1,000,000 X 101%)................
Less: Net carrying amount of bonds redeemed:
Par value.........................................................
Unamortized discount...................................
Unamortized bond issue costs....................
Loss on redemption
Calculation of unamortized discount
Original amount of discount:
$1,000,000 X 3% = $30,000
$30,000/10 = $3,000 amortization per year
Amount of discount unamortized:
$3,000 X 5 = $15,000
Calculation of unamortized issue costs
Original amount of costs:
$24,000 X $1,000,000/$1,500,000 = $16,000
$16,000/10 = $1,600 amortization per year
Amount of costs unamortized:
$1,600 X 5 = $8,000
January 2, 2010
Bonds Payable.........................................................
Loss on Redemption of Bonds..............................
Unamortized Bond Issue Costs..................
Discount on Bonds Payable.......................
Cash..............................................................

$1,010,000
$1,000,000
(15,000)
(8,000)

977,000
$ 33,000

1,000,000
33,000
8,000
15,000
1,010,000