Logan Corporation issued $800,000 of 8% bonds on October 1, 2006, due on October 1, 2011. 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. Logan Corporation closes its books annually on December 31.

Instructions

(a) Prepare the amortization schedule (effective interest method) through October 1, 2007.

(b) Prepare the adjusting entry for December 31, 2007. Use the effective-interest method.

(c) Compute the interest expense to be reported in the income statement for the year ended December 31, 2007.

Question

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Respuesta :

jepessoa jepessoa · Answer 1 · 2020-08-05T06:03:30+02:00

Answer:

a)

period interest interest discount amortized bond's

payment expense on BP discount carrying value

0 49,320.60 750,679.40

1 32,000 37,533.97 43,786.63 5,533.97 756,213.37

2 32,000 37,810.67 37,975.96 5,810.67 762,024.04

3 32,000 38,101.20 31,874.76 6,101.20 768,125.24

4 32,000 38,406.26 43,786.63 6,406.26 774,531.50

b)

December 31, 2017, accrued interest on bonds payable

Dr Interest expense 19,050.60

Cr Interest payable 16,000

Cr Discount on bonds payable 3,050.60

c)

total interest expense year 2007:

($37,533.97/2) + $37,810.67 + ($38,101.20/2) = $18,776.99 + $37,810.67 + $19,050.60 = $75,638.26

Explanation:

the market price of the bonds:

$800,000 / 1.05¹⁰ = $491,130.60

$32,000 x 8.1109 (PV annuity factor, 4%, 10 periods) = $259,548.80

market price = $750,679.40

discount on bonds payable $49,320.60

discount amortization first payment = (750,679.40 x 0.05) - 32,000 = 5,533.97

discount amortization second payment = (756,213.37 x 0.05) - 32,000 = 5,810.67

discount amortization third payment = (762,024.04 x 0.05) - 32,000 = 6,101.20

discount amortization fourth payment = (768,125.24 x 0.05) - 32,000 = 6,406.26