... This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Cole uses the effective-interest method to amortize bond premium or discount.
Prepare the schedule using effective-interest method to amortize bond premium or discount of Cole Corporation
Prepare the journal entries to record the issuance of the bonds
Accounting Cole Corporation issued $522,000, 6%, 23-year bonds on January 1, 2014, for $413,730.?
- Posted:
- 3+ months ago by tiper00
- Topics:
- price, bond, year, january, interest, cole, years, accounting, corporation, 2014
Answers (1)
To solve the problem, we'll follow these steps:
Understand the details:
Face Value (Par Value): $522,000
Coupon Rate: 6%
Effective Interest Rate: 8%
Term: 23 years
Issue Price: $413,730 (sold at a discount)
Annual Coupon Payment: 522,000×6%=31,320522,000×6%=31,320
Interest Payable Date: January 1 each year
Step 1: Prepare the amortization schedule
Using the effective-interest method, we calculate the following for each year:
Interest Expense: \text{Carrying Amount} \times \text{Effective Interest Rate (8%)}
Amortization of Discount: Interest Expense−Coupon Payment (31,320)Interest Expense−Coupon Payment (31,320)
New Carrying Amount: Carrying Amount+Amortization of DiscountCarrying Amount+Amortization of Discount
Year Carrying Amount Interest Expense Coupon Payment Amortization of Discount New Carrying Amount
2014 413,730 33,098.40 31,320 1,778.40 415,508.40
2015 415,508.40 33,240.67 31,320 1,920.67 417,429.07
2016 417,429.07 33,394.33 31,320 2,074.33 419,503.40
2017 419,503.40 33,560.27 31,320 2,240.27 421,743.67
2018 421,743.67 33,739.49 31,320 2,419.49 424,163.16
(Note: The schedule can be extended for all 23 years, following the same calculations.)
Step 2: Prepare journal entries
Issuance of bonds on January 1, 2014
Record the issuance of the bonds at a discount:
Dr Cash 413,730
Dr Discount on Bonds Payable 108,270
Cr Bonds Payable 522,000
Payment of interest and amortization on January 1, 2015
From the amortization schedule:
Interest Expense (effective rate): $33,098.40
Coupon Payment: $31,320
Discount Amortization: $1,778.40
Dr Interest Expense 33,098.40
Cr Discount on Bonds Payable 1,778.40
Cr Cash 31,320
Payment of interest and amortization on January 1, 2016
From the amortization schedule:
Interest Expense: $33,240.67
Coupon Payment: $31,320
Discount Amortization: $1,920.67
Dr Interest Expense 33,240.67
Cr Discount on Bonds Payable 1,920.67
Cr Cash 31,320
(The same format applies for all subsequent years.)
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