Question

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		enter percentages rounded to 0 decimal places	%
The effective rate		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

Answer 1

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