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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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Effective Interest Method for Lucy Corporation issuance of bonds

On January 1, 2007, Lucy Corporation issued $1,200,000 face value, 7% 10 -year
bonds at $1,119,479 This price resulted in an effective-interest rate of 8% on the bonds.
Lucy uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest
January 1.
Instructions: (Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.

01/01/07 Account title Amount
Account title Amount
Account title Amount

(b) Prepare an amortization table through December 31, 2009 (three interest periods) for this bond issue.

LUCY CORP.
Bond Discount Amortization
Effective-Interest Method—Annual Interest Payments
7% Bonds Issued at 8%
(A) (B) (C) (D) (E)
"Annual
Interest
Periods" "Interest
to be
Paid" "Interest
Expense
to be
Recorded" "Discount
Amor-
tization
(B) - (A)" "Unamor-
tized
Discount
(D) - (C)" "Bond
Carrying
Value
($1,200,000 - D)"
Issue date
1
2
3

(c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2007.

12/31/07 Account title Amount
Account title Amount
Account title Amount

(d) Prepare the journal entry to record the payment of interest on January 1, 2008.

01/01/08 Account title Amount
Account title Amount

(e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2008.

12/31/08 Account title Amount
Account title Amount
Account title Amount

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