On June 30, 2014, 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.
(Round answers to the nearest cent)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on June 30, 2014.
(2) The payment of interest and the amortization of the premium on December 31, 2014.
(3) The payment of interest and the amortization of the premium on June 30, 2015.
(4) The payment of interest and the amortization of the premium on December 31, 2015.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2015, balance sheet.
(c) Provide the answers to the following questions.
(1) What amount of interest expense is reported for 2015?
(2) Will the bond interest expense reported in 2015 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?
The solution is provided in an excel file showing the journal entries for the following:
(1) The issuance of the bonds on June 30, ...
The solution shows the journal entries for the issuance of bonds at a premium, as well as the calculation of interest and amortization of premium associated with the issue.