Answer:
Master Corp.
a. Journal Entries:
1. Feb. 1, 2020:
Debit Cash $85,685
Credit 8% Bonds Payable $80,000
Credit Bonds Premium $5,685
To record the issuance of bonds at premium.
2. July 31, 2020:
Debit Interest Expense $2,999
Debit Bonds Premium $201
Credit Cash $3,200
To record the first payment of interest on the bonds and amortization of premium.
December 31, 2020:
Debit Interest Expense $2,493
Debit Bonds Premium $174
Credit Interest Payable $2,667
To accrue interest expense and bonds payable.
4. January 31, 2021:
Debit Interest Expense $499
Debit Bonds Premium $34
Debit Interest Payable $2,667
Credit Cash $3,200
To record the payment of interest.
b. Balance Sheet as of December 31, 2020:
Liabilities:
Bonds Payable $80,000
Bonds Premium $5,310 ($5,685 - 201 - 174)
Income Statement for the year ended December 31, 2020:
Interest Expense $5,492
c. The total cost of financing the bonds for full term is $58,315.04.
d. The total cost of financing is $58,315.04
e. Interest expense would have remained the same.
f. The interest expense would have remained the same as it is not dependent on the premium amortization method used.
Explanation:
a) Data and Calculations:
February 1, 2020:
Face value of issued bonds = $80,000
Price of issued bonds = $85,685
Premium on bonds = $5,685
N (# of periods) 20
I/Y (Interest per year) 8
PMT (Periodic Payment) = $
3,200
Results:
PV = $85,684.96
Sum of all periodic payments = $64,000.00
Total Interest $58,315.04
July 31, 2020:
Cash payment = $3,200 ($80,000 * 4%)
Interest Expense 2,999 ($85,685 * 3.5%)
Premium amortized $201
December 31, 2020:
Interest Payable = $2,667 ($80,000 * 4% * 5/6)
Interest expense = $2,493
Premium amortized $174
January 31, 2021:
Interest Expense $499
Bonds Premium $34
Interest Payable $2,667
