Question: Valdez issues $450,000 of 13%, four-
Valdez issues $450,000 of 13%, four-year bonds dated January 1, 2015, that pay interest semiannually on June 30 and December 31. They are issued at $493,608, and their market rate is 10% at the issue date.
Required
1. Prepare the January 1, 2015, journal entry to record the bonds’ issuance.
2. Determine the total bond interest expense to be recognized over the bonds’ life.
3. Prepare an effective interest amortization table like the one in Exhibit 14B.2 for the bonds’ first two years.
4. Prepare the journal entries to record the first two interest payments.
5. Prepare the journal entry to record the bonds’ retirement on January 1, 2017, at 106.
Analysis Component
6. Assume that the market rate on January 1, 2015, is 14% instead of 10%. Without presenting numbers, describe how this change affects the amounts reported on Valdez’s financial statements.
Exhibit 14B.2:
Transcribed Image Text:
EXHIBIT 14B.2 B D. E F Bonds: $100,000 Par Value, Semiannual Interest Payments, Two-Year Life, 6% Semiannual Contract Rate, 5% Semiannual Market Rate 1 Effective Interest Amortization of Bond Premium (A) Cash Interest Paid (В) Bond Interest (C) (D) Semiannual Interest Period-End Premium Unamortized Premium Carrying Value $104,000 Carrying value Expense Amortization Prior (D) - (C) $3,546 6% x $100,000 5% x Prlor (E) (A) - P $100,000 + (D) (0) 12/31/2015 $103,546 7 $100,000 (1) 6/30/2016 $ 823. $6,000 6,000 - $5,177 2,723 1,859 102,723 (2) 12/31/2016 5,136 864 101,859 10 $96,000 (3) |11 (4) 12 6/30/2017 6,000 5,093 907 952 100,952 12/31/2017 5,048 952 100,000 6,000 $24,000 $20,454 $3,546 Bonds Payable 12/31/2015 100,000 Column (A) is the par value ($100,000) multiplied by the semiannual contract rate (6%). Column (B)is the prior period's carying value multiplied by the semianual market rate (5%). Column (C) is the difference between interest paid and bond interest expense, or ((A) - (B))- Column (D) is the prior period's unamortized premium less the current period's premium amortization. Column (E)is the par value plus unamortized premium, or [$100,000 + (D)). 6/30/2016 12/31/2016 6/30/2017 12/31/2017 100,000 Premium on Bonds Payable value after deducting the amortized premium in column C from the prior period's carrying value. Column D shows the premium's reduction by periodic amortization. When the issuer makes the first semiannual interest payment, the effect of premium amortization on bond interest expense and bond 1281/2016 864 liability is recorded as follows: 12/31/2015 3.546 6/30/2016 823 6/30/2017 907 1231/2017 952 |12/31/2017 2016 June 30 Assets = Liabilities + Equity Bond Interest Expense Premium on Bonds Payable Cash.. To record semiannual interest and premium amortization (effective interest method). 5,177 -6,000 -823 -5,177 823 6,000 12/312015 ea0/2016 1291/2016 6/302017 12/312017
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