Homework answers / question archive / DeVry University, Keller Graduate School of Management - ACCT 550 1)On June 30, 2017, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%

DeVry University, Keller Graduate School of Management - ACCT 550 1)On June 30, 2017, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%

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DeVry University, Keller Graduate School of Management - ACCT 550

1)On June 30, 2017, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Instructions

 (a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on June 30, 2017.

 (2) The payment of interest and the amortization of the premium on December 31, 2017.

 (3) The payment of interest and the amortization of the premium on June 30, 2018.

 (4) The payment of interest and the amortization of the premium on December 31, 2018.

 (b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2018, balance sheet.

 (c) Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2018?

 (2) Will the bond interest expense reported in 2018 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

 (3) Determine the total cost of borrowing over the life of the bond.

 (4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

2 On June 30, 2009, County Company issued 12% bonds with a par value of $800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of $1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.