Financial Reporting II Exam 2 Extra Credit Fall 2015

Question

On September 30, 2015, Evan Tube Inc. issued $1,624,000 of 8% bonds plus accrued interest. Interest is payable semiannually on January 1 and July 1 with the bonds maturing July 1, 2025. The market rate of interest at the time of issuance was 10% and Evan usesthe effective-interest method to amortize any premium or discount. Legal and other costs of $20,000 were incurred in connection with the issue and are being amortized on a straight-line basis over the life of the bond.

Periods

PV of a Single Sum 10%

PV of an Annuity at 10%

PV of a Single Sum 8%

PV of an Annuity at 8%

PV of a Single Sum 5%

PV of an Annuity at 5%

PV of a Single Sum 4%

PV of an Annuity at 4%

10

0.38554

6.14457

0.46319

6.71008

0.61391

7.72173

0.67556

8.11090

20

0.14864

8.51356

0.21455

9.81815

0.37689

12.46221

0.45639

13.59033

A. What is the present value of the$1,624,000 bonds on September 30, 2015? Show all supporting calculations.

1624000 * 0.37689 = 612069.36

64960 * 12.46221 = 809545.16

612069.36+809545.16 = 1421614.52

B. Prepare the relevant bond amortization table through January 1, 2017:

Periods

A
Interest to be Paid
(4% X $1624000)

B
Interest Expense to be recorded
(5% X Preceding Bonds Carrying value)

C
Discount Amortization
B-A

D
Unamortized Discount
D-C

E
Bond Carrying Value
(1624000 -D)

30-Sep-15

32,480

35,540

?

202,385

1,421,615

2016/1/1

64,960

71,081

6,121

196,265

1,427,735

2016/7/1

64,960

71,387

6,427

189,838

1,434,162

2017/1/1

64,960

71,708

6,748

183,090

1,440,910

C. Prepare the relevant journal entries for the bonds on the following dates :

September 30, 2015

December 31, 2015

Debt to Bond issuance cost 615.38

January 1, 2016

July 1, 2016

D. OnDecember 31, 2016, Evan called $1,300,000 of the bonds at 101.5 in accordance with the provisions of the bond indenture and retired them. What is the gain or loss on the transaction? Show all relevant calculations.

Correct answer: loss on redemption 93263.88

E. Prepare all the necessary journal entries for December 31, 2016.