Question

On June 30, 2017, Blue Company issued $3,500,000 face value of 13%, 20-year bonds at $3,763,303, a yield of 12%. Blue uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Prepare the journal entries to record the following transactions. (Round answer to 0 decimal places, e.g. 38,548. 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.)

(1) The issuance of the bonds on June 30, 2017.

(2) The payment of interest and the amortization of the premium on December 31, 2017.

(3) The payment of interest and the amortization of the premium on June 30, 2018.

(4) The payment of interest and the amortization of the premium on December 31, 2018.

Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.)

Blue Company

Balance Sheet

Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2018? (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense reported for 2018 $

(2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The bond interest expense reported in 2018 will be greater than less than same as the amount that would be reported if the straight-line method of amortization were used.

(3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.)

Total cost of borrowing over the life of the bond $

(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

The total bond interest expense for the life of the bond will be greater than less than the same as

the total interest expense if the straight-line method of amortization were used.

Please explain the steps

Answer 1

Answer:

Explanation:

Proceed from Issue of Bonds = $3,763,303

Face Value of Bonds = $3,500,000

Annual Interest Rate = 12%

Semi-annual Interest Rate = 6%

Annual Coupon Rate = 13%

Semi-annual Coupon Rate = 6.5%

Semi-annual Coupon = 6.5%*$3,500,000

Semi-annual Coupon = $227,500

Journal entries:

June 30, 2017

Dr Cash $3,763,303

Cr Premium on bonds payable $263,303

Cr Bonds payable $3,500,000

Dec 31, 2017

Dr Interest expense ($3,763,303*6%) $225,798

Dr Premium on bonds payable $1,702

Cr Cash $227,500

June 30, 2018

Dr Interest expense ($3,761,601*6%) $225,696

Dr Premium on bonds payable $1,804

Cr Cash $227,500

December 31, 2018

Dr Interest expense (3,759,797*6%) $225,587

Dr Premium on bonds payable $1,912

Cr Cash $227,500

Interest expense in 2018 = $225,696+$225,587= $451,284

Premium on bonds payable $263,303

Annual Amortization of Premium = $263,303 / $40

Annual Amortization of Premium = $6,583

Annual Interest = Cash Payment - Annual Amortization of Premium

Annual Interest = $227,500 - $6,583

Annual Interest = $220,917

Interest Expense in 2018 = 2*$220,917  = $441,834

Interest Expense in 2018 using straight line amortization is less than interest expense in 2018 using effective interest method.