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    Bond Issuance - Effective Interest Rate Method

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    The following amortization and interest schedule reflects the issuance of 11-year bonds by Capulet Corporation on January 1, 2006, and the subsequent interest payments and charges. The company's year-end is December 31, and financial statements are prepared once yearly.
    Amortization Schedule
    Year
    Cash
    Interest
    Amount
    Unamortized
    Carrying
    Value
    1/1/2006 $44,403 $ 167,697
    2006 $23,331 $25,155 42,579 169,521
    2007 23,331 25,428 40,482 171,618
    2008 23,331 25,743 38,070 174,030
    2009 23,331 26,105 35,296 176,804
    2010 23,331 26,521 32,106 179,994
    2011 23,331 26,999 28,438 183,662
    2012 23,331 27,549 24,220 187,880
    2013 23,331 28,182 19,369 192,731
    2014 23,331 28,910 13,790 198,310
    2015 23,331 37,121 212,100
    (a) Indicate whether the bonds were issued at a premium or a discount.
    (b) Indicate whether the amortization schedule is based on the straight-line method or the effective-interest method.
    (c) Determine the stated interest rate and the effective-interest rate. (Round answers to 0 decimal places, e.g. $38,548.)
    The stated rate %
    The effective rate %
    (d) On the basis of the schedule above, prepare the journal entry to record the issuance of the bonds on January 1, 2006. (Round answers to 0 decimal places, e.g. $38,548. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
    Account Titles and Explanation
    Debit
    Credit
    (e) On the basis of the schedule above, prepare the journal entry to reflect the bond transactions and accruals for 2006. (Interest is paid January 1.) (Round answers to 0 decimal places, e.g. $38,548. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
    Account Titles and Explanation
    Debit
    Credit
    (f) On the basis of the schedule above, prepare the journal entries to reflect the bond transactions and accruals for 2013. Capulet Corporation does not use reversing entries. (Round answers to 0 decimal places, e.g. $38,548. Credit account titles are automatically indented when amount is entered. Do not indent manually.
    Account Titles and Explanation
    Debit
    Credit
    Jan. 1, 2013
    Dec. 31, 2013

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    Solution Summary

    The solution provides a comprehensive explanation to show effective interest rate method and how the amortization table is made.

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