Accounting: Problems and Solutions
On July 1, 2010, Rossillon Company issued $4,000,000 face value, 8%, 10-year bonds at $3,501,514.This price resulted in an effective-interest rate of 10% on the bonds Rossill on uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2010.
(2) The accrual of interest and the amortization of the discount on December 31, 2010.
(3) The payment of interest and the amortization of the discount on July 1, 2011, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the discount on December 31, 2011.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2011, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2011?
(2) Would the bond interest expense reported in 2011 be the same as, greater than, or less than 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.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense that would be reported if the straight-line method of amortization were used?
SOLUTION
(a) (1) 2010 July 1 Cash 3,501,514 Discount on Bonds Payable 498,486 Bonds Payable 4,000,000
(2) Dec. 31 Bond Interest Expense ($3,501,514 X 5%) 175,076 Discount on Bonds Payable 15,076 Bond Interest Payable ($4,000,000 X 4%) 160,000
(3) 2011 July 1 Bond Interest Expense [($3,501,514 + $15,076) X 5%] 175,830 Discount on Bonds Payable 15,830 Cash 160,000
(4) Dec. 31 Bond
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2010.
(2) The accrual of interest and the amortization of the discount on December 31, 2010.
(3) The payment of interest and the amortization of the discount on July 1, 2011, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the discount on December 31, 2011.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2011, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2011?
(2) Would the bond interest expense reported in 2011 be the same as, greater than, or less than 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.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense that would be reported if the straight-line method of amortization were used?
SOLUTION
(a) (1) 2010 July 1 Cash 3,501,514 Discount on Bonds Payable 498,486 Bonds Payable 4,000,000
(2) Dec. 31 Bond Interest Expense ($3,501,514 X 5%) 175,076 Discount on Bonds Payable 15,076 Bond Interest Payable ($4,000,000 X 4%) 160,000
(3) 2011 July 1 Bond Interest Expense [($3,501,514 + $15,076) X 5%] 175,830 Discount on Bonds Payable 15,830 Cash 160,000
(4) Dec. 31 Bond