Problem 7-36 Straight-line amortization of a bond discount LO7-8 During 2014 and 2015, Cook Co. completed the followingtransactions relating to its bond issue. The companyâs fiscal yearends on December 31.
2014
Mar. 1 Issued $300,000 of ten-year, 7 percent bonds for$285,000. The semiannual cash payment for interest is due on March1 and September 1, beginning September 2014.
Sept. 1 Recognized interest expense including the amortizationof the discount and made the semiannual cash payment forinterest.
Dec. 31 Recognized accrued interest expense including theamortization of the discount.
2015
Mar. 1 Recognized interest expense including the amortization ofthe discount and made the semiannual cash payment for interest.
Sept. 1 Recognized interest expense including the amortizationof the discount and made the semiannual cash payment forinterest.
Dec. 31 Recognized accrued interest expense including theamortization of the discount.
Problem 7-36 Straight-line amortization of a bond discount LO7-8 During 2014 and 2015, Cook Co. completed the followingtransactions relating to its bond issue. The companyâs fiscal yearends on December 31.
2014
Mar. 1 Issued $300,000 of ten-year, 7 percent bonds for$285,000. The semiannual cash payment for interest is due on March1 and September 1, beginning September 2014.
Sept. 1 Recognized interest expense including the amortizationof the discount and made the semiannual cash payment forinterest.
Dec. 31 Recognized accrued interest expense including theamortization of the discount.
2015
Mar. 1 Recognized interest expense including the amortization ofthe discount and made the semiannual cash payment for interest.
Sept. 1 Recognized interest expense including the amortizationof the discount and made the semiannual cash payment forinterest.
Dec. 31 Recognized accrued interest expense including theamortization of the discount.
Related questions
| During 2014 and 2015, Cook Co. completed the following transactions relating to its bond issue. The companyâs fiscal year ends on December 31. |
| 2014 | ||
| Mar. | 1 | Issued $360,000 of eight-year, 5 percent bonds for $348,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014. |
| Sept. | 1 | Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. |
| Dec. | 31 | Recognized accrued interest expense including the amortization of the discount. |
| 2015 | ||
| Mar. | 1 | Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. |
| Sept. | 1 | Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest. |
| Dec. | 31 | Recognized accrued interest expense including the amortization of the discount. |
| Required | |||||
| a-1. | When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? | ||||
| |||||
| a-2. | If the bonds had sold at face value, what amount of cash would Cook Co. have received? |
| b. | Prepare the liabilities section of the balance sheet at December 31, 2014 and 2015. |
| c. | Determine the amount of interest expense Cook would report on the income statements for 2014 and 2015. |
| d. | Determine the amount of interest Cook would pay to the bondholders in 2014 and 2015. |
The following transactions were completed by Hobson Inc., whosefiscal year is the calendar year:
| 2014 | |
| July 1. | Issued $7,430,000 of five-year, 8%callable bonds dated July 1, 2014, at a market (effective) rate of9%, receiving cash of $7,136,042. Interest is payable semiannuallyon December 31 and June 30. |
| Oct. 1. | Borrowed $310,000 as a 10-year, 7%installment note from Marble Bank. The note requires annualpayments of $44,137, with the first payment occurring on September30, 2015. |
| Dec. 31. | Accrued $5,425 of interest on theinstallment note. The interest is payable on the date of the nextinstallment note payment. |
| Dec. 31. | Paid the semiannual interest on thebonds. The bond discount is amortized annually in a separatejournal entry. |
| Dec. 31. | Recorded bond discount amortizationof $29,396, which was determined using the straight-linemethod. |
| Dec. 31. | Closed the interest expenseaccount. |
| 2015 | |
| June 30. | Paid the semiannual interest on thebonds. |
| Sept. 30. | Paid the annual payment on thenote, which consisted of interest of $21,700 and principal of$22,437. |
| Dec. 31. | Accrued $5,032 of interest on theinstallment note. The interest is payable on the date of the nextinstallment note payment. |
| Dec. 31. | Paid the semiannual interest on thebonds. The bond discount is amortized annually in a separatejournal entry. |
| Dec. 31. | Recorded bond discount amortizationof $58,792, which was determined using the straight-linemethod. |
| Dec. 31. | Closed the interest expenseaccount. |
| 2016 | |
| June 30. | Recorded the redemption of thebonds, which were called at 98. The balance in the bond discountaccount is $176,374 after payment of interest and amortization ofdiscount have been recorded. (Record the redemption only.) |
| Sept. 30. | Paid the second annual payment onthe note, which consisted of interest of $20,129 and principal of$24,008. |
Required:
1. Journalize the entries to record theforegoing transactions. For compound transactions, if an amount boxdoes not require an entry, leave it blank or enter "0". Whenrequired, round your answers to the nearest dollar.
Entries for Bonds Payable and Installment Note Transactions
The following transactions were completed by Hobson Inc., whosefiscal year is the calendar year:
| 2016 | |
| July 1. | Issued $4,370,000 of five-year, 8% callable bonds dated July 1,2016, at a market (effective) rate of 9%, receiving cash of$4,197,109. Interest is payable semiannually on December 31 andJune 30. |
| Oct. 1. | Borrowed $170,000 as a 10-year, 8% installment note from MarbleBank. The note requires annual payments of $25,335, with the firstpayment occurring on September 30, 2017. |
| Dec. 31. | Accrued $3,400 of interest on the installment note. Theinterest is payable on the date of the next installment notepayment. |
| Dec. 31. | Paid the semiannual interest on the bonds. The bond discountamortization of $17,289 is combined with the semiannual interestpayment. |
| Dec. 31. | Closed the interest expense account. |
| 2017 | |
| June 30. | Paid the semiannual interest on the bonds. The bond discountamortization of $17,289 is combined with the semiannual interestpayment. |
| Sept. 30. | Paid the annual payment on the note, which consisted ofinterest of $13,600 and principal of $11,735. |
| Dec. 31. | Accrued $3,165 of interest on the installment note. Theinterest is payable on the date of the next installment notepayment. |
| Dec. 31. | Paid the semiannual interest on the bonds. The bond discountamortization of $17,289 is combined with the semiannual interestpayment. |
| Dec. 31. | Closed the interest expense account. |
| 2018 | |
| June 30. | Recorded the redemption of the bonds, which were called at 98.The balance in the bond discount account is $103,735 after paymentof interest and amortization of discount have been recorded.(Record the redemption only.) |
| Sept. 30. | Paid the second annual payment on the note, which consisted ofinterest of $12,661 and principal of $12,674. |
Required:
1. Journalize the entries to record theforegoing transactions. For compound transactions, if an amount boxdoes not require an entry, leave it blank or enter "0". Whenrequired, round your answers to the nearest dollar.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 2016 | |||
| July 1 | Cash | ||
| Discount on bonds payable | |||
| Bonds payable | |||
| Oct. 1 | Cash | ||
| Notespayable | |||
| Dec. 31-Note | Interest expense | ||
| Notespayable | |||
| Dec. 31-Bond | Cash | ||
| Interest expense | |||
| Gain on bonds payable | |||
| Dec. 31-Closing | Bonds payable | ||
| Discount onbonds payable | |||
| 2017 | |||
| June 30 | Cash | ||
| Discount on bonds payable | |||
| Interest expense | |||
| Sept. 30 | Interest expense | ||
| Notes payable | |||
| Cash | |||
| Dec. 31-Note | |||
| Dec. 31-Bond | Notes payable | ||
| Interest expense | |||
| Cash | |||
| Dec. 31-Closing | Discount on bonds payable | ||
| Bondspayable | |||
| 2018 | |||
| June 30 | Bonds payable | ||
| Cash | |||
| Gain on redemption of bonds | |||
| Sept. 30 | |||
| Notes payable | |||
2. Indicate the amount of the interest expensein (a) 2016 and (b) 2017.
a. 2016 $
b. 2017 $
3. Determine the carrying amount of the bondsas of December 31, 2017.
$
