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Alex Ar [27]
3 years ago
14

Sanford Co. sells $500,000 of 10% bonds on March 1, 2020. The bonds pay interest on September 1 and March 1. The due date of the

bonds is September 1, 2023. The bonds yield 12%. Give entries through December 31, 2021. Prepare a bond amortization schedule using the effective-interest method for discount and premium amortization. Amortize premium or discount on interest dates and at year-end. (Round answers to 0 decimal places, e.g. 38,548.)

Business
1 answer:
Triss [41]3 years ago
3 0

Answer:

ATTACHED file with the bonds schedule

Explanation:

First, we solve for the proceed from the issuance:

PV of the coupon:

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\

C 25,000.000 (500,000 x 10%/2)

time 7 (3 and a half year x 2 payment per year)

rate 0.06 (12% annual / 2)

25000 \times \frac{1-(1+0.06)^{-7} }{0.06} = PV\\

PV $139,559.5360

PV of maturity:

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity   500,000.00

time   7.00

rate  0.06

\frac{500000}{(1 + 0.06)^{7} } = PV  

PV   332,528.56

PV c $139,559.5360

PV m  $332,528.5568

Total $472,088.0928

Then we construct the bonds schedule as follows:

procceds 472,088

face value 500,000

discount on bonds payable -27,912

bond rate 0.05

market rate 0.06

ionterest expense: carrying value times market rate:

472,088 x 0.06 = 28,325.29

cash outlay          25,000

amortization          3,325.29

carrying value after first payment:

472,088 + 3,325.29 = 475,413.29

and the process repeat for all periods.

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Date       Account Titles               Debit    Credit

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Date       Account Titles               Debit    Credit

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Common Stock

Date       Account Titles               Debit    Credit

Mar. 1     Cash                                       $100,000

Service Revenue

Date       Account Titles               Debit    Credit

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Date       Account Titles               Debit    Credit

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Date       Account Titles               Debit    Credit

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Date       Account Titles               Debit    Credit

Mar. 31   Cash                           $2,500

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a) Data and Analysis:

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Mar. 1 Prepaid Insurance $1,200 Cash $1,200

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