The fiscal year of Russell Inc., a manufacturer of acoustical supplies, ends December 31. Selected
transactions for the period 2007 through 2014, involving bonds payable issued by Russell Inc.,
are as follows:
2007
June 30 Issued $2,000,000 of 15-year, 10% callable bonds dated June 30, 2007, when the market
rate of interest was 12%. Interest is payable semiannually on June 30 and December 31.
Dec. 31 Paid the semiannual interest on the bonds.
31 Recorded amortization of the bond discount using the straight-line method.
2008
June 30 Paid the semiannual interest on the bonds, and recorded amortization of the bond
discount using the straight-line method.
Dec. 31 Paid the semiannual interest on the bonds, and recorded amortization of the bond
discount using the straight-line method.
2014
June 30 Recorded the redemption of the bonds, which were called at 101–^12 after the payment of
interest and amortization of discount have been recorded. (Record the redemption only.)Instructions
- Calculate the selling price of the bonds, the amount of the bond discount or premium, and
the semiannual bond discount or premium amortization. Use the present value tables in
Appendix A. Round to the nearest dollar. - Record the entries for the preceding transactions.
- Determine the amount of interest expense for 2007 and 2008.
- Determine the carrying amount of the bonds as of December 31, 2008.
Solution
- Sales Price of the Bonds
Present value of bond principal:
PrincipalPresent Value of $1i=6%, n=30
$2,000,0000.17411 = $ 348,220
Present value of bond interest:
PrincipalPresent Value of Annuity of $1i=6%, n=30
$100,00013.76483 = 1,376,483
Sales price of the bonds $1,724,703
Calculation of Bond Discount and Discount Amortization
Face Value of Bonds $2,000,000
Sales Price of the Bonds 1,724,703
Bond Discount $ 275,297
Bond Discount $ 275,297
Amortization period (15 years) 15
Annual bond discount amortization $ 18,353
Semiannual interest periods (semiannual periods per year) 2
Semiannual bond discount amortization $ 9,177
472 Chapter 10 Liabilities
Quick assetsCash, cash equivalents, and receivables that
can be quickly converted into cash.
Quick ratioA financial ratio that measures the ability to pay
current liabilities with quick assets (cash, marketable securi-
ties, accounts receivable).
Ratio of total liabilities to total assetsThe percent of
total assets that are funded by total liabilities; a measure of
solvency.Serial bondsBonds whose maturities are spread over
several dates.Straight-line methodA method of amortizing a bond
discount or premium in equal periodic amounts.Term bonds Bonds of an issue that mature at the
same time.ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM