Question

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

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

Homework Answers

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)
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