Problem 141 The following amortization and interest schedule

Problem 14-1

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

(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. 18%.)

(d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2011. (If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2011

(e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2011. (Interest is paid January 1.) (If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

December 31, 2011

(f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2018. Sandhill Corporation does not use reversing entries. (If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

Solution

a. If carrying value increases after amortisation of unamortised amount, bonds are issued at discount.

hence in this case carrrying value of bonds is increasing over time, bonds are originally issued at discount.

b. The amount of interest is exactly equal to 12% of opening liability balance.

for example in year 2011 interest expense= 202662 *12%= 24319

Hence effective interest method is used. if straight line was used then the difference between unamortised discount balance from one year to next year should be the same for all years whereas it is not so in this case.

c. Stated interest rate= cash/(unamortised discount+carrying value) *100 = 23628/(12138+202662) *100 = 11%

effective interest rate= interest/ opening carrying value *100 = 24319/202662 *100 = 12%

d.

e.

f.

The amount mentioned in discount on bonds payable is the amount = Interest expense- interest payable in cash