Question

Grove Corporation issued $4,000,000 of 8% bonds on October 1, 2014, due on October 1, 2019. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31.

Instructions

(a)   Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method.

                                                                          Debit                       Credit           Carrying Amount

                                         Credit Cash      Interest Expense      Bond Discount            of Bonds   

        October 1, 2010                                                                                                     $3,691,117

        April 1, 2011

        October 1, 2011

b) Prepare the adjusting entry for December 31,2015 using Straight line interest method

c)Compute the straight line interest expense to be reported in the income statement for the year ended December 31,2015

Answer 1

a) Amortisation schedule:
Date	Credit Cash	Debit Interest expense	Credit Bond Discount	Carrying Amount
Oct 1 2014				3691117
Apr 1 2015	160000	184555.9	24555.85	3715672.85		(4m*4%)
Oct 1 2015	160000	185783.6	25783.6425	3741456.493
b) Adjusting entry for Dec 31, 2015 on Straight Line Interest Method
Date	Acc. Titles	Debit $	Credit $
31-Dec-15	Interest Expense	110888.3
	Discount on Bond Payable		30888.3			(4000000-3691117)/10
	Interest payable		80000
	(being adjustment entry at year end for interest expense booked)
c) Interest expense as per Straight line method to be
reported on Dec 31, 2015= 110888.30*4 = 443553.20