ACCT 201 Principles of Financial Accounting
Practice Final Exam
Combined Chapters 9-12
Dr. Fred Barbee

Solution to Short-Problem #2

Short Problem #2

A company issued 10%, 10-year bonds with a par value of $1,000,000 on January 1, 2002, at a selling price of $885,295, to yield the buyers a 12% return. The company uses the effective interest amortization method. Interest is paid semiannually each June 30 and December 31.

  1. Prepare an amortization table for the first two payment periods using the format shown below:

    Semiannual
    Interest
    Period
    Cash
    Interest
    Paid
    Bond
    Interest
    Expense

    Discount
    Amortization

    Unamortized
    Discount

    Carrying
    Value
    06/30/02
    $50,000
    $53,117.70
    $3,117.70
    $111,587.30
    $888,412.70
    12/31/02
    50,000
    53,304.76
    3,304.76
    108,282.54
    891,717.46

    Calculations for 06/30/02
    Cash payment: $1,000,000 x 10% x 1/2 year = $50,000.00
    Interest Expense: $888,295 x 12% x 1/2 = $53,117.70
    Discount Amortized: $53,117.70 - $50,000.00 = $3,117.70
    Unamortized Discount: ($1,000,000 - $888,295) - $3,117.70 = $111,587.30 Carrying Value: $1,000,000 - $111,587.30 = $888,412.70

    Calculations for 12/31/02
    Cash payment: $1,000,000 x 10% x 1/2 year = $50,000.00
    Interest Expense: $888,412.70 x 12% x 1/2 = $53,304.76
    Discount Amortized: $53,304.76 - $50,000.00 = $3,304.76
    Unamortized Discount: $111,587.30 - $3,304.76 = $108,282.54 Carrying Value: $1,000,000 - $108,282.54 = $891,717.46

  2. Prepare the journal entry to record the first semiannual interest payment.

Journal Entry to Record the First Semiannual Interest Payment
Bond Interest Expense
53,117.70
 
Discount on Bonds Payable
 
3,117.70
Cash
 
50,000.00