Question

In each of the following independent cases, the company closes its books on December 31.

1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.

2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.

Instructions

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Short answer

1. Sanford, Co issues bonds at a discount of$27,917.
2. Titania Co issued bonds at a premium of$25,856.

Step-by-step solution

Definition of Bond Amortization

Bond amortization can be defined as the method under which the business entity spreads the discount or the premium on the bonds payable over its life. It is generally done using methods such as the straight-line method and the effective interest method.

Journal entries for Sanford Co

Date	Accounts and Explanation	Debit ($)	Credit ($)
1 March 2017	Cash	$472,083
	Discount on bond payable	$27,917
	Bonds payable		$500,000
1 Sep 2017	Interest expenses	$28,325
	Discount on bond payable		$3,325
	Cash		$25,000
31 Dec 2017	Interest expenses	$19,017
	Discount on bond payable $\left(\$3,525\times \frac{4}{6}\right)$		$2,350
	Interest payable $\left(\$25,000\times \frac{4}{6}\right)$		$16,667
1 March 2018	Interest expenses	$9,508
	Interest payable	$16,667
	Discount on bond payable		$1,175
	Cash		$25,000
1 Sep 2018	Interest expenses	$28,736
	Discount on bond payable		$3,736
	Cash		$25,000
31 Dec 2018	Interest expenses $\left(\frac{\$28,960}{6}\times 4\right)$	19,307
	Discount on bond payable $\left(\frac{\$3,960}{6}\times 4\right)$		2,640
	Interest payable $\left(\frac{\$25,000}{6}\times 4\right)$		$16,667

Amortization table:

Date	Interest on bond payable at stated rate (5%)	Interest on book value at market rate (6%)	Amortized discount	Unamortized Discount	Bond payable	Book value
1 March 2017				$27,917	$500,000	$472,083
1 Sep 2017	$25,000	$28,325	3,325	24,592	$500,000	475408
1 March 2018	25,000	28,525	3,525	21,067	$500,000	478,933
1 Sep 2018	25,000	28,736	3,736	17,331	$500,000	482,669
1 March 2019	25,000	28,960	3,960	13,371	$500,000	486,629

Working note:

Calculation of discount or premium on bonds:

Particular	Amount $
Maturity value	$500,000
Less: present value of bonds payable ($500,000, n=7 @6%)	(332,500)
Less: Present value of interest ($25,000n=7 @6%)	(139,583)
Discount on bonds issued	$27,917

Journal entries for Titania Co

Date	Accounts and Explanation	Debit $	Credit $
1 June 2017	Cash	$425,856
	Premium on bonds payable		$25,856
	Bonds payable		$400,000
1 Dec 2017	Interest expenses	$21,293
	Premium on bond payable	$2,707
	Cash		$24,000
31 Dec 2017	Interest expenses $\left(\$21,157\times \frac{1}{6}\right)$	$3,526
	Premium on bond payable $\left(\$2,843\times \frac{1}{6}\right)$	$474
	Interest payable $\left(\$24,000\times \frac{1}{6}\right)$		4,000
1 June 2018	Interest expenses	$17,631
	Interest payable	$4,000
	Premium on bond payable $\left(\$2,843\times \frac{5}{6}\right)$	$2,369
	Cash		$24,000
1 Oct 2018	Interest expenses $\left(\$21,015\times \frac{4}{6}\times \frac{\$120,000}{\$400,000}\right)$	$4,203
	Premium on bond payable $\left(\$2,985\times \frac{4}{6}\times \frac{\$120,000}{\$400,000}\right)$	$597
	Cash		$4,800
1 Oct 2018	Bond payable	$120,000
	Premium on bond payable	$5,495
	Gain on redemption		$4,295
	Cash		$121,200
1 Dec 2018	Interest expenses $\left(\$21,015\times 70\%\right)$	$14,711
	Premium on bond payable	$2,089
	Cash role="math" localid="1659213160139" $(\$24,000\times 70\%)$		$16,800
31 Dec 2018	Interest expenses $\left(\$20,866\times 70\%\times \frac{1}{6}\right)$	$2,432
	Premium on bond payable $\left(\$3,134\times 70\%\times \frac{1}{6}\right)$	$366
	Interest payable $\left(\$24,000\times 70\%\times \frac{1}{6}\right)$		$2,800
1 June 2019	Interest expenses $\left(\$20,866\times 70\%\times \frac{5}{6}\right)$	$12,172
	Interest payable	$2,800
	Premium on bond payable $\left(\$3,134\times 70\%\times \frac{5}{6}\right)$	$1,828
	Cash		$16,800
1 Dec 2019	Interest expenses $\left(\$20,709\times 70\%\right)$	$14,496
	Premium on bond payable $\left(\$3,291\times 70\%\right)$	$2,304
	Cash $\left(\$24,000\times 70\%\right)$		16,800

Working note:

Date	Interest on bond payable at the stated rate (6%)	Interest on book value at market rate (5%)	Amortized premium	Unamortized premium	Bond payable	Book value
1 June 2017				$25,856	$400,000	$425,856
1 Dec 2017	$24,000	$21,293	$2,707	$23,149	$400,000	$423,149
1 June 2018	$24,000	$21,157	$2,843	$20,306	$400,000	$420,306
1 Dec 2018	$24,000	$21,015	$2,985	$17,321	$400,000	$417,321
1 June 2019	$24,000	$20,866	$3,134	$14,187	$400,000	$414,187
1 Dec 2019	$24,000	$20,709	$3,291	$10,896	$400,000	$410,896

Calculation of discount or premium on bond payable:

Particular	Amount $
Maturity value	$400,000
Less: Present value of the maturity value (n=8, r=5%)	(270,720)
Less: PVOAF of interest payable semi-annually (n=8, r=5%) (6.464)	(155,136)
Premium on bond payable	$25,856

Calculation of reacquisition price:

Particular	Amount $
Reacquisition price$\left(\$126,000-\left(12\%\times \$120,000\times \frac{4}{12}\right)\right)$	$121,200
Carrying amount of the bonds redeemed	($120,000)
Unamortized premium $\left[\left(\$25,856-\$2,707-\$2,843\right)\times 30\%\right]\mathbf{-}\mathbf{\$}\mathbf{597}$	($5,495)
Gain on redemption	$4,295