Accy 510, Sp 2008, UIUC (Doogar).
Diagnostic Test (Quiz 0, Ungraded)
Logan Corporation issued $600,000 of 8% bonds on October 1, 2004, due on October 1,
2009. The interest is to be paid twice a year on April 1 and October 1. The bonds were
sold to yield 10% effective annual interest. Logan Corporation closes its books annually
on December 31.
Required:
(a) Complete the following amortization schedule for the dates indicated. (Round all
answers to the nearest dollar.) Use the effective interest method.
Cash
October 1, 2004
Interest Expense
Bond Discount
Carrying Amount
of Bond
$553,668
April 1, 2005
October 1, 2005
(b) Prepare the adjusting entry for December 31, 2005. Use the effective interest method.
(c) Compute the interest expense to be reported in the income statement for the year
ended December 31, 2005.
(d) Assume that on January 1, 2006, Logan retired $150,000 of these bonds at 101 plus
accrued interest. Prepare journal entries to record the retirement on January 1, 2006.
Accy 510, Sp 2008, UIUC (Doogar).
Solution to Diagnostic Test (Quiz 0, Ungraded)
Logan Corporation issued $600,000 of 8% bonds on October 1, 2004, due on October 1,
2009. The interest is to be paid twice a year on April 1 and October 1. The bonds were
sold to yield 10% effective annual interest. Logan Corporation closes its books annually
on December 31.
Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all
answers to the nearest dollar.) Use the effective interest method.
Credit Cash
October 1, 2004
April 1, 2005
October 1, 2005
$24,000
24,000
Debit
Interest Expense
$27,684
27,868
Credit
Carrying Amount
Bond Discount of Bonds
$553,668
$3,684
557,352
3,868
561,220
(b) Prepare the adjusting entry for December 31, 2005. Use the effective interest method.
Interest Expense ($561,220 × 10% × 3/12) .......................................
Interest Payable (1/2 × $24,000) ...........................................
Discount on Bonds Payable ($14,031 – $12,000)
14,031
12,000
2,031
Ask yourself what are the account balances as of 12/31/2005? In what accounts? What
is the carrying value on 12/31/2005? (see below for hints).
(c) Compute the interest expense to be reported in the income statement for the year
ended December 31, 2005.
$13,842 …
(1/2 of $27,684)
27,868
14,031
$55,741
(d) Assume that on January 1, 2006, Logan retired $150,000 of these bonds at 101 plus
accrued interest. Prepare journal entries to record the retirement on January 1, 2006.
Interest Payable ($150,000 × 8% × 3/12) ................................................
Cash ($150,000 × 8% × 3/12) ................................................
Bonds Payable ..........................................................................................
Loss on Redemption of Bonds ...........................................................
Discount on Bonds Payable [(1/4 × ($38,780-2030)] ...........
Cash .......................................................................................
Hint/solution:
* unamortized discount on 10/01/05: 600,000- 561,220 = 38,780
unamortized discount on 12/31/05: 38,780-2,030=36,750.
3,000
3,000
150,000
10,687
9,187
151,500