S. Strigel Chemical Company
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P11-7A S. Strigel Chemical Company used effective interest method to amortize bond premium or discount. On July 1, 2006, S. Strigel Chemical Company issued $5, 000, 000 face value, 10%, 10-year bonds at $5, 679, 533. This price resulted in an 8% effective-interest rate on the bonds. Strigel uses the effective-interest method to amortize bond premium or discount.The bonds paysemiannual interest on each July 1 and January 1. Instructions (Round all computations to the nearest dollar.) (a) Prepare the journal entries to record the following transactions. (1) The issuance of the bonds on July 1, 2006. (2) The accrual of interest and the amortization of the premium on December 31, 2006. (3) The payment of interest and the amortization of the premium on July 1, 2007, assuming no accrual of interest on June 30. (4) The accrual of interest and the amortization of the premium on December 31, 2007. (b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2007, balance sheet. (c) Provide the answers to the following questions in letter form. (1) What amount of interest expense is reported for 2007? (2) Would the bond interest expense reported in 2007 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) Would the total bond interest expense be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used? journal entries for bond amortization
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July 1, 2006 Cash 5,679,533
Bonds Payable 5,000,000
Premium on Bonds Payable 679,533
Dec. 31, 2006 Bond Interest Expenses (5,679,533 x 0.08 x 1/2) 227,181
Premium on Bonds Payable 22,819
Cash (5,000,000 x 0.10 x 1/2) 250,000
July 1, 2007 Bond Interest Expenses ((5,679,533 - 22,819) x 0.08 x 1/2) 226,269
Premium on Bonds Payable 23,731
Cash (5,000,000 x 0.10 x 1/2) 250,000
Dec. 31, 2007 Bond Interest Expenses ((5,656,714 - 23,731) x 0.08 x 1/2) 225,319
Premium on Bonds Payable 24,681
Cash (5,000,000 x 0.10 x 1/2) 250,000 ...
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