The following amortization and interest schedule reflects the issuance of 10-year bonds by...

Question:

The following amortization and interest schedule reflects the issuance of 10-year bonds by Bramble Corporation on January 1, 2011, 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
1/1/2011 $59,197 $176,703
2011 $23,590 $26,505 56,282 179,618
2012 23,590 26,943 52,929 182,971
2013 23,590 27,446 49,073 186,827
2014 23,590 28,024 44,639 191,261
2015 23,590 28,689 39,540 196,360
2016 23,590 29,454 33,676 202,224
2017 23,590 30,334 26,932 208,968
2018 23,590 31,345 19,177 216,723
2019 23,590 32,508 10,259 225,641
2020 23,590 33,849 235,900

(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.

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.

(e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2011.

(f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2018. Bramble Corporation does not use reversing entries.

Bonds:

Bonds are long-term debt instruments issued by companies in exchange for capital. Bonds are characterized by their principal (maturity) values and their interest rates. Interest rates determine the interest to be earned by investors on the bond. The issuance price of a bond depends on the bond's interest rate in comparison to the market rate.

Answer and Explanation:

(a) Indicate whether the bonds were issued at a premium or a discount.

We see that over time the carrying value of the bond increases from $176,703 in 2011 to $235,900 in 2020. Thus, the bonds were initially issued at a discount.

(b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method.

Under the straight-line method, the amount amortized per period is equal in amount. However, we see that the difference between the amount unamortized from year to year varies. Thus, we determine that the effective-interest method was used.

(c) Determine the stated interest rate and the effective-interest rate.

Stated Interest Rate

  • Cash Paid = Face Value x Stated Interest Rate
  • $23,590 = $235,900 x Stated Interest Rate
  • $23,590 / $235,900 = Stated Interest Rate
  • 10% = Stated Interest Rate

Effective-Interest Rate

  • Interest = Carrying Value x Effective Interest Rate
  • $26,505 = $176,703 x Effective Interest Rate
  • $26,505 / $176,703 = Effective Interest Rate
  • 15% = Effective Interest Rate

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011.

Date Account Debit Credit
1/1/2011 Cash $176,703
Discount on Bonds Payable $59,917
Bonds Payable $235,900

(e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2011.

Date Account Debit Credit
12/31/2011 Interest Expense $26,505
Cash $23,590
Discount on Bonds Payable $2,915

(f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2018.

Date Account Debit Credit
12/31/2018 Interest Expense $31,345
Cash $23,590
Discount on Bonds Payable $7,755

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