P14-5 (Comprehensive Bond Problem) In each of the following independent cases the company closes its books on December 31. * 1. Sanford Co. sells $500,000 of 10% bonds on March 1, 2010. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2013. The bonds yield 12%. Give entries through December 31, 2011. * 2. Titania Co. sells $400,000 of 12% bonds on June 1, 2010. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2014. The bonds yield 10%. On October 1, 2011, Titania buys back $120,000 worth of bonds for $126,000 (includes accrued interest). Give entries through December 1, 2012. * Instructions * (Round to the nearest dollar.) * For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)
1.
500,000 x .66506 = 332,530
500,000 x 10% x 6/12 = 25,000
25,000 x 5.58238 = 139,560 (rounded)
332,530 + 139,560 = 472,090
500,000 – 472,090 = 27,910

Schedule of Bond Discount Amortization
Effective-Interest Method – Semiannual Interest Payments
10% Bonds Sold to Yield 12%

Date | Cash Paid | Interest Expense | Discount Amortized | Carrying Amount of Bonds | 3/1/10 | | | | $472,090 | 9/1/10 | $25,000 | $28,325 | $3,325 | 475,415 | 3/1/11 | 25,000 | 28,525 | 3,525 | 478,940 | 9/1/11 | 25,000 | 28,736 | 3,736 | 482,676 | 3/1/12 | 25,000 | 28,961 | 3,961 | 486,637 | 9/1/12 | 25,000 | 29,198 | 4,198 | 490,835 | 3/1/13 | 25,000 | 29,450 | 4,450 | 495,285 | 9/1/13 | 25,000 | 29,717 | 4,715 | 500,000 |

12/31/10
3,525 x 4 / 6 = 2,350
25,000 x 4 / 6 = 16,667

3/1/11
3,525 x 2 / 6 = 1,175

12/31/11
3,961 x 4 / 6 = 2,641

3/1/10 Cash 472,090
Discount on Bonds Payable 27,910 Bonds Payable 500,000

9/1/10 Interest Expense 28,325 Discount on Bonds Payable 3,325 Cash 25,000

12/31/10 Interest Expense 19,017 Discount on Bonds Payable 2,350 Interest Payable 16,667

3/1/11 Interest Expense 9,508 Interest Payable 16,667 Discount on Bonds Payable 1,175 Cash 25,000

9/1/11 Interest Expense 28,736 Discount on Bonds Payable 3,736 Cash 25,000

12/31/11 Interest Expense 19,308 Discount on Bonds Payable 2,641 Interest Payable 16,667