Question

The following amortization and interest schedule reflects the issuance of  10-year bonds by Headland 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						$ 24,975		$  196,025
2011		$ 22,100		$ 23,523		23,552		197,448
2012		22,100		23,694		21,958		199,042
2013		22,100		23,885		20,173		200,827
2014		22,100		24,099		18,174		202,826
2015		22,100		24,339		15,935		205,065
2016		22,100		24,608		13,427		207,573
2017		22,100		24,909		10,618		210,382
2018		22,100		25,246		7,472		213,528
2019		22,100		25,623		3,949		217,051
2020		22,100		26,049				221,000

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

  DiscountPremium

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

  Effective interest methodStraight-line method

(c) Determine the stated interest rate and the effective-interest rate. (Round answers to 0 decimal places, e.g. 18%.)

The stated rate			%
The effective rate			%

(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.Headland 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
January 1, 2018December 31, 2018
January 1, 2018December 31, 2018

Answer 1

a) Bond is issued at Discount

b) Amortization schedule is based on effective interest method

c) Stated rate = 22100*100/221000 = 10%

Effective rate = 23523/196025 = 12%

d) Journal entry

Date	account and explanation	debit	credit
Jan 1,2011	Cash	196025
	Discount on bonds payable	24975
	Bonds payable		221000
	(To record bond issue)

e) Journal entry

Date	account and explanation	debit	credit
Dec 31,2011	Interest expense	23523
	Discount on bonds payable		1423
	Interest payable		22100
	(To record accural interest)

f) Journal entry

Date	account and explanation	debit	credit
Jan 1,2018	Interest payable	22100
	Cash		22100
	(To record interest paid)
Dec 31,2018	Interest expense	25246
	Discount on bonds payable		3146
	Interest payable		22100
	(To record accural interest)