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On July 1, 2008 bonds of 4,000,000 face value of 13%, 20 year bonds are issued to yield 11%. Interest is paid semiannually on January 1 and July 1 and the effective interest method is used.

Required:

1. All entries from the issuance date through 12-31-09. Assume reversing entries are used.
2. The proper balance sheet presentation for the bonds payable at 12/31/09.
3. Answers to the following questions:
a. What amount of interest expense will be reported for 2009?
b. Will the bond interest expense reported in 2009 be the same as, greater than, or less than the amount that would be reported if the straight line method of amortization were used?
c. Determine the total cost of borrowing over the life of the bond.
d. Will total bond interest expense for the life of the bond be greater than, or less than the amount that would be reported if the straight line method of amortization were used?

Note: To calculate the price of the bond you will need PV factors for 5.5% for 40 semi-annual periods. You can easily figure them out either using the formulas underlying the PV factors in the ch. 6 tables or doing the PV calc in excel. But to make your life a little easier, here are the factors:

The single sum factor is 0.11746314 and the ordinary annuity factor is 16.0461247

Given the length of the bond and it being semiannual interest, it would be useful to put together an excel sheet to do the effective interest amtz chart and see if things work out after 40 rows.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M9897708
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