P12-37. Accounting for bonds; various scenarios (L.O. 12-3, L.O. 12-4) (Difficult - 30 minutes) Three independent situations follow: 1. I'm Alive Ltd. (IAL) issued $5,000,000 in stripped (zero-coupon) bonds that mature in 10 years. The market rate of interest for bonds of a similar nature is 3.6% compounded monthly. Five and a half years after issue, when the market rate was 4.8%, IAL repurchased $2,000,000 of the bonds on the open market. IAL accrues interest monthly. Bonds are carried at amortized cost. 2. Creative Accountants sold $2,000,000 of five-year bonds that pay the then- current market rate of interest of 6% annually on December 31. The bonds are dated January 1, 2018, but were not issued until February 1, 2018. Creative's year-end is December 31. Creative has adopted a policy of crediting interest expense for the interest accrued up to the date of sale. 3. On January 1, 2020, Able Minded Professors Corp. (AMPC) sold $3,000,000 of three-year, 5% bonds priced to yield 4.5%. Interest is payable on June 30 and December 31 each year. Required a. Prepare journal entries to record: i. The sale and retirement of the bonds in Scenario 1. ii. The sale of the bonds in Scenario 2 and payment of interest on December 31, 2018. iii. The sale of the bonds in Scenario 3. b. Prepare a schedule of interest expense and bond amortization during the life of the bond in Scenario 3. P12-37. Accounting for bonds; various scenarios (L.O. 12-3, L.O. 12-4) (Difficult - 30 minutes) Three independent situations follow: 1. I'm Alive Ltd. (IAL) issued $5,000,000 in stripped (zero-coupon) bonds that mature in 10 years. The market rate of interest for bonds of a similar nature is 3.6% compounded monthly. Five and a half years after issue, when the market rate was 4.8%, IAL repurchased $2,000,000 of the bonds on the open market. IAL accrues interest monthly. Bonds are carried at amortized cost. 2. Creative Accountants sold $2,000,000 of five-year bonds that pay the then- current market rate of interest of 6% annually on December 31. The bonds are dated January 1, 2018, but were not issued until February 1, 2018. Creative's year-end is December 31. Creative has adopted a policy of crediting interest expense for the interest accrued up to the date of sale. 3. On January 1, 2020, Able Minded Professors Corp. (AMPC) sold $3,000,000 of three-year, 5% bonds priced to yield 4.5%. Interest is payable on June 30 and December 31 each year. Required a. Prepare journal entries to record: i. The sale and retirement of the bonds in Scenario 1. ii. The sale of the bonds in Scenario 2 and payment of interest on December 31, 2018. iii. The sale of the bonds in Scenario 3. b. Prepare a schedule of interest expense and bond amortization during the life of the bond in Scenario 3
