Question

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

The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2014, 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

1/1/2014

\$5,651 \$ 94,349

2014

\$11,000 \$11,322 5,329 94,671

2015

11,000 11,361 4,968 95,032

2016

11,000 11,404 4,564 95,436

2017

11,000 11,452 4,112 95,888

2018

11,000 11,507 3,605 96,395

2019

11,000 11,567 3,038 96,962

2020

11,000 11,635 2,403 97,597

2021

11,000 11,712 1,691 98,309

2022

11,000 11,797 894 99,106

2023

11,000 11,894 100,000

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.

 The stated rate The effective rate enter percentages rounded to 0 decimal places % enter percentages rounded to 0 decimal places %

d.On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2014.

Date

Account Titles and Explanation

Debit

Credit

January 1, 2014

enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount

e. On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2014. (Interest is paid January 1.)

Date

Account Titles and Explanation

Debit

Credit

December 31, 2014

enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount

f.On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2021. Capulet Corporation does not use reversing entries.

Date

Account Titles and Explanation

Debit

Credit

choose a transaction date

January 1, 2021December 31, 2021

enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount
choose a transaction date

January 1, 2021December 31, 2021

enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount

All amounts are in \$

(a) The bonds are issued at discount as the carrying value is less than it's face value of 100,000

(b) The amortization schedule is prepared based on effective interest rate method. If the straight line method had been followed then the amortization expense would remained same every year, which is not happened in the given schedule.

(c)

Stated Interest rate = 11,000/100,000 = 11%

Effective Interest rate = 11,322/94,349 = 12%

(d) Journal Entry on Jan 1, 2014

Cash 94,349

Discount on bonds 5,651

Bonds Payable 100,000

(e) On December 31, 2014

Interest Expense 11,322

Discount on bonds 322

Interest payable 11,000

(f)

On January 1, 2021

Interest Payable 11,000

Cash 11,000

On December 31, 2021

Interest Expense 11,712

Discount on bonds 712

Interest Payable 11,000

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