Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

*EXERCISE 10-12

Purpose: (L.O. 10) This exercise will illustrate the computations and journal entries for a bond when the effective-interest method of amortization is used.

The Jan Larsen Corporation issued bonds with the following details:

Face value	$100,000.00
Contractual interest rate	7%
Market interest rate	10%
Maturity date	January 1, 2017
Date of issuance	January 1, 2014
Issuance price	$92,539.95
Interest payments due	Annually on January 1
Method of amortization	Effective-interest
End of annual reporting period	December 31

Instructions

• (a) Complete the amortization schedule for these bonds which appears below.
• (b) Prepare the journal entries to record:
  • (1) The issuance of the bonds on January 1, 2014.
  • (2) The adjusting entry(s) at December 31, 2014.
  • (3) The payment entry on January 1, 2015. (Assume reversing entries are not used.)

SOLUTION TO EXERCISE 10-12

Explanation: Interest to be paid (stated interest) is determined by multiplying the face value ($100,000) by the contractual interest rate (7%). Interest expense is computed by multiplying the carrying value at the beginning of the interest period by the effective-interest rate (10%). The amount of discount amortization for the period is the excess of the interest expense over the stated interest ...