Part 1
As the controller of Lynbrook, Inc., you were asked to evaluate a potential bond issuance to raise funds to expend the company’s operations. Lynbrook is considering issuing a $10 million 5- year, 12 percent bonds payable on June 30, 2020. Interest would be payable semiannually on December 31 and June 30. Bond discounts and premiums would be amortized at each interest payment date using the straight-line method. The company's fiscal year ends at December 31.
Requirement:
A. Prepare an amortization table for each of the 10 semiannual periods, under each of the following assumptions:
1. The bonds were issued at 98. (round to the nearest dollar.)
2. The bonds were issued at 101. (round to the nearest dollar.)
B. Prepare the journal entry to record the issuance of the bonds on June 30, 2020 if Lynbrook issues the bonds at 98.
c. Prepare the journal entries necessary to record the semiannual bond interest payments on December 31, 2020 and June 30, 2021, if the bonds were issued at 101.
Part 2
The long-range strategic budgeting process also called for Lynbrook to borrow $2,000,000 cash on January 1, 2020 from Wells Fargo by signing a ten-year 6% installment note. The note requires equal payments of principal and interest on December 31 each year in the amount of $271,736.
Required
1. Prepare the journal entries required by Lynbrook on the following dates:
a) December 31, 2020
b) December 31, 2021
Determine the total interest expense Lynbrook will recognize over the life of the note.
Part 1
Item A
| Face value of bonds | $ 10,000,000 | $ 10,000,000 | |
| Multiply: | Bonds issued at | 98% | 101% |
| Cash received from bonds | $ 9,800,000 | $ 10,100,000 | |
| Less: | Face value of bonds | $ 10,000,000 | $ 10,000,000 |
| Bonds Premium (Discount) | $ (200,000) | $ 100,000 | |
| Divided: | Number of period | $ 10 | $ 10 |
| Amortization of Bonds Premium (Discount) | $ (20,000) | $ 10,000 |
| Interest payment (Credit Cash) = 10000000*12%*6/12 = 600000 | |||||||
| Interest Expense (Debit Interest Expense) = Interest Expense + Amortization of bond Discount | |||||||
| Amortization of bond Discount (Credit Bond Discount) =.20000 | |||||||
| Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount | |||||||
| Credit Balance in Bond Payable = Face value of bond | |||||||
| Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount | |||||||
| Bond Discount Amortization Table | |||||||
| Debit Balance in Bond Discount at end of retirement of bond payable must be Zero. | |||||||
| Period | Date | Interest payment | Interest Expense | Amortization of bond Discount | Debit Balance in Bond Discount | Credit Balance in Bond Payable | Book value of Bond |
| 0 | Jun 30, 2020 | $ 200,000 | $ 10,000,000 | $ 9,800,000 | |||
| 1 | Dec 31, 2020 | $ 600,000 | $ 620,000 | $ 20,000 | $ 180,000 | $ 10,000,000 | $ 9,820,000 |
| 2 | Jun 30, 2021 | $ 600,000 | $ 620,000 | $ 20,000 | $ 160,000 | $ 10,000,000 | $ 9,840,000 |
| 3 | Dec 31, 2021 | $ 600,000 | $ 620,000 | $ 20,000 | $ 140,000 | $ 10,000,000 | $ 9,860,000 |
| 4 | Jun 30, 2022 | $ 600,000 | $ 620,000 | $ 20,000 | $ 120,000 | $ 10,000,000 | $ 9,880,000 |
| 5 | Dec 31, 2022 | $ 600,000 | $ 620,000 | $ 20,000 | $ 100,000 | $ 10,000,000 | $ 9,900,000 |
| 6 | Jun 30, 2023 | $ 600,000 | $ 620,000 | $ 20,000 | $ 80,000 | $ 10,000,000 | $ 9,920,000 |
| 7 | Dec 31, 2023 | $ 600,000 | $ 620,000 | $ 20,000 | $ 60,000 | $ 10,000,000 | $ 9,940,000 |
| 8 | Jun 30, 2024 | $ 600,000 | $ 620,000 | $ 20,000 | $ 40,000 | $ 10,000,000 | $ 9,960,000 |
| 9 | Dec 31, 2024 | $ 600,000 | $ 620,000 | $ 20,000 | $ 20,000 | $ 10,000,000 | $ 9,980,000 |
| 10 | Jun 30, 2025 | $ 600,000 | $ 620,000 | $ 20,000 | $ - | $ 10,000,000 | $ 10,000,000 |
| Interest payment (Credit Cash) = 10000000*12%*6/12 = 600000 | |||||||
| Interest Expense (Debit Interest Expense) = Interest payment - Amortization of bond premium | |||||||
| Amortization of bond premium (Debit Bond Premium) = 10000 | |||||||
| Credit Balance in Bond premium = Credit Balance in Bond premium for previous period - Amortization of bond premium | |||||||
| Credit Balance in Bond Payable = Face value of bond | |||||||
| Book value of Bond = Credit Balance in Bond premium + Credit Balance in Bond Payable | |||||||
| Bond Premium Amortization Table | |||||||
| Credit Balance in Bond premium at end of retirement of bond payable must be Zero. | |||||||
| Period | Date | Interest payment | Interest Expense | Amortization of bond premium | Credit Balance in Bond premium | Credit Balance in Bond Payable | Book value of Bond |
| 0 | Jun 30, 2020 | $ 100,000 | $ 10,000,000 | $ 10,100,000 | |||
| 1 | Dec 31, 2020 | $ 600,000 | $ 590,000 | $ 10,000 | $ 90,000 | $ 10,000,000 | $ 10,090,000 |
| 2 | Jun 30, 2021 | $ 600,000 | $ 590,000 | $ 10,000 | $ 80,000 | $ 10,000,000 | $ 10,080,000 |
| 3 | Dec 31, 2021 | $ 600,000 | $ 590,000 | $ 10,000 | $ 70,000 | $ 10,000,000 | $ 10,070,000 |
| 4 | Jun 30, 2022 | $ 600,000 | $ 590,000 | $ 10,000 | $ 60,000 | $ 10,000,000 | $ 10,060,000 |
| 5 | Dec 31, 2022 | $ 600,000 | $ 590,000 | $ 10,000 | $ 50,000 | $ 10,000,000 | $ 10,050,000 |
| 6 | Jun 30, 2023 | $ 600,000 | $ 590,000 | $ 10,000 | $ 40,000 | $ 10,000,000 | $ 10,040,000 |
| 7 | Dec 31, 2023 | $ 600,000 | $ 590,000 | $ 10,000 | $ 30,000 | $ 10,000,000 | $ 10,030,000 |
| 8 | Jun 30, 2024 | $ 600,000 | $ 590,000 | $ 10,000 | $ 20,000 | $ 10,000,000 | $ 10,020,000 |
| 9 | Dec 31, 2024 | $ 600,000 | $ 590,000 | $ 10,000 | $ 10,000 | $ 10,000,000 | $ 10,010,000 |
| 10 | Jun 30, 2025 | $ 600,000 | $ 590,000 | $ 10,000 | $ - | $ 10,000,000 | $ 10,000,000 |
Item B
| Journal entries | |||
| Date | Account title | Debit | Credit |
| Jun 30, 2020 | Cash | $ 9,800,000 | |
| Discount on Bond payable | $ 200,000 | ||
| Bond payable | $ 10,000,000 | ||
| (To record issued of bond payable at Discount.) |
Item C