Pr. 1—Bond discount amortization.

On June 1, 2013, Everly Bottle Company sold $400,000 in long-term bonds for $351,040. The
bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The
bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under
the effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest
expense and discount amortization at each May 31. Include only the first four years. Make
sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $351,040 was determined from present value tables. Specifically explain
how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2015. (Round to the nearest dollar.)

Solution 1
(a) Cash Interest Discount Carrying Amount
Date Paid Expense Amortized of Bonds
6/1/13 $351,040
5/31/14 $32,000 $35,104 $3,104 354,144
5/31/15 32,000 35,414 3,414 357,558
5/31/16 32,000 35,756 3,756 361,314
5/31/17 32,000 36,131 4,131 365,445

(b) (1) Find the present value of $400,000 due in 10 years at 10%.
(2) Find the present value of 10 annual payments of $32,000 at 10%.
Add (1) and (2) to obtain the present value of the principal and the interest payments.

(c) Interest Expense ......................................................................... 20,858*

Interest Payable ............................................................... 18,667**
Bonds Payable................................................................. 2,191

*7/12  $35,756 (from Table) = $20,858

**7/12  8%  $400,000 = $18,667

Pr. 2—Entries for bonds payable.

Its books on December 31.
Holden Co. sells $300,000 of 10% bonds on March 1, 2015. The bonds pay interest on
September 1 and March 1. The due date of the bonds is September 1, 2013. The bonds yield
12%, selling for $283,250. Give entries through March 1, 2016.

Solution 2
3/1/15 Cash......................................................................................... 283,250
Bonds Payable............................................................... 283,250
9/1/15 Interest Expense ($283,250 × .06)........................................... 16,995
Bonds Payable............................................................... 1,995
Cash ($300,000 ×.05) .................................................... 15,000
12/31/15 Interest Expense [($283,250 + $1,995) × .06 × 4/6]......... 11,410
Bonds Payable............................................................... 1,410
Interest Payable ($15,000 × 4/6) .................................... 10,000
3/1/16 Interest Expense [($283,250 + $1,995) × .06 × 2/6]................. 5,705
Interest Payable ..................................................................... 10,000
Bonds Payable............................................................... 705
Cash .............................................................................. 15,000

Pr. 3—Comprehensive bond problem.

Titania Co. sells $600,000 of 12% bonds on June 1, 2015. The bonds pay interest on
December 1 and June 1. The due date of the bonds is June 1, 2020. The bonds yield 10%,
selling for $638,780. On October 1, 2016, Titania buys back $300,000 worth of bonds for
$315,000 (includes accrued interest). Give entries through October 1, 2016.
Instructions
(Round to the nearest dollar.)
Prepare all of the relevant journal entries from the time of sale until the date indicated. Amortize
premium or discount on interest dates and at year-end. (Assume that reversing entries were
made.)

Solution 3
6/1/15 Cash..................................................................................... 638,780
Bonds Payable ........................................................... 638,780

12/1/15 Interest Expense ($638,780 × .05)....................................... 31,939

Bonds Payable .................................................................... 4,061
Cash ($600,000 ×.06) ................................................ 36,000

12/31/15 Interest Expense [($638,780 – $4,061) × .05 × 1/6]............ 5,289

Bonds Payable .................................................................. 711
Interest Payable ($36,000 × 1/6) ................................ 6,000

6/1/16 Interest Expense....................................... ........................... 31,736

Bonds Payable .................................................................... 4,264
Cash .......................................................................... 36,000

10/1/16 Interest Expense

[($634,719 – $4,264) × .5* × .05 × 4/6]...................... 10,508
Bonds Payable .................................................................. 1,492
Cash $300,000 × .06 × 4/6......................................... 12,000

*$300,000 ÷ $600,000 = .5

10/1/16 Bonds Payable.................................................................... 313,736

Gain on Extinguishment of Bonds............................... 10,736*
Cash .......................................................................... 303,000
*Reacquisition price
$315,000 – ($300,000 × 6% × 4/6)............................................ 303,000
Net carrying amount of bonds redeemed:
($630,455* × .50) – $1,492.............................................................. 313,736
Gain on extinguishment.................................................................. $ (10,736)
*$638,780 – $4,061 – $4,264