Question

On June 1, 2008, Angelo Bottle Company sold $500,000 in long-term bonds for $438,800. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective interest method.

(a)   Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Make sure all columns and rows are properly labelled. (Round to the nearest dollar.)

(b) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2010. (Round to the nearest dollar.)

Answer 1

(a)
	Date	Interest Paid (A)	Int. Expenses (B)	Disc. Amortization (c)	Carrying amount (D)
			(B) = (D) x 10%	(c) = (B) - (A)
	June 01, 2008				$438,800
	May 31, 2009	$40,000	$43,880	$3,880	$442,680
	May 31, 2010	$40,000	$44,268	$4,268	$446,948
(b)
	Date	Accounts Titles	Debit	Credit
	Dec 31, 2010	Interest Expenses	$25,823
		Discount on Bonds Payable		$2,490
		Interest Payable		$23,333
	Working
		Interest Expenses	$25,823
		($44,268 x 7/12)
		Discount on Bonds Payable	$2,490
		($4,268 x 7/12)