Answer:
<h2>(a) </h2>
Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on January 1, 2014.
- Dr Cash 2,147,202
- Cr Bonds payable 2,000,000
- Cr Premium on bonds payable 147,202
(2) Accrual of interest and amortization of the premium on December 31, 2014.
effective interest rate amortization = ($2,147,202 x 6%) - ($2,000,000 x 7%) = $128,832.12 - $140,000 = -$11,167.88 ≈ -$11,168
- Dr Interest expense 128,832
- Dr Premium on bonds payable 11,168
- Cr Interest payable - bonds 140,000
(3) The payment of interest on January 1, 2015.
- Dr Interest payable - bonds 140,000
- Cr Cash 140,000
(4) Accrual of interest and amortization of the premium on December 31, 2015.
effective interest rate amortization = ($2,136,034 x 6%) - ($2,000,000 x 7%) = $128,162 - $140,000 = -$11,838
- Dr Interest expense 128,162
- Dr Premium on bonds payable 11,838
- Cr Interest payable - bonds 140,000
<h2>(b) </h2>
Show the proper long-term liabilities balance sheet presentation for the liability for bonds payable at December 31, 2015.
Long term liabilities:
Bonds payable $2,000,000
Premium on bonds payable $124,196
<h2>(c) </h2>
Provide the answers to the following questions in narrative form.
(1) What amount of interest expense is reported for 2015?
- During 2015, total interest expense on bonds payable is equal to $128,162.
(2) Would the bond interest expense reported in 2015 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
- If the straight line amortization method was used, the interest expense during 2015 would have been less than the current interest expense using the effective interest method ($125,280 < $128,162).
