Prepare the journal entries related to the sale of bonds and subsequent payments on those bonds. Also prepare the year-end accrual of interest expense

1. Sanford Co. sells

$500,000

of

5%

bonds on March 1, 2014. The

bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2017.

The bonds yield

6%

Give the entries through December 31, 2015.

A) Prepare the Bond Discount Amortization Table

Schedule of Bond Discount Amortization

Effective Interest Method

10% Bonds Sold to Yield 12%

Amortization

Carrying

Cash

Interest

of Bond

Value

Date

Paid

Interest Expense

Discount

of Bonds

Mar 1, 14

Amount

Sep 1, 14

Formula

Formula

Formula

Formula

Mar 1, 15

Formula

Formula

Formula

Formula

Sep 1, 15

Formula

Formula

Formula

Formula

Mar 1, 16

Formula

Formula

Formula

Formula

Sep 1, 16

Formula

Formula

Formula

Formula

Mar 1, 17

Formula

Formula

Formula

Formula

Sep 1, 17

Formula

Formula

Formula

Formula

B) Prepare journal entry to record issuance of the bond on March 1, 2014

Mar 1, 14

Account Title

Amount

Account Title

Amount

Account Title

Amount

C) Prepare the journal entry to record the first payment of bond interest on September 1.

Sep 1, 14

Account Title

Amount

Account Title

Amount

Account Title

Amount

D) Prepare the journal entry to reord the accrual of interest at December 31. Assume that no prior accruals have been made.

Dec 31, 14

Account Title

Amount

Account Title

Amount

Account Title

Amount

Note: Amortization table is semi-annual, interest rate is stated as annual value.

E) Prepare the journal entry for the March 1, payment of interest. Assume that no additional accruals

have been made since December and no reversing entry was made at December.

Mar 1, 15

Account Title

Amount

Account Title

Amount

Account Title

Amount

Account Title

Amount

F) Prepare the journal entry to record the payment of bond interest on September 1.

Sep 1, 15

Account Title

Amount

Account Title

Amount

Account Title

Amount

G) Prepare the journal entry to record the accrual of interest at December 31.

Dec 31, 15

Account Title

Amount

Account Title

Amount

Account Title

Additional instructions (if you need them.)
Three matters are necessary to address a time value of money problem.
	Matter 1 - cash flow	What are the cash flows? We look at the bond contract to determine the cash flows. In this
		problem we are told that cash will be paid out every 6 months at an amount of
		face value (10,000)		x	stated rate (10%)
		The common way to talk about the stated rate is in annual terms, so 10% is annual.
		The semi-annual cash flow is half of the annual amount.
		In addition, the principle will be paid out at the end of the contract.
	Matter 2 - timing	We take into account the length of time over which the payments will occur.
		We do this by using the present value of an annuity formula.
		We also take into account the final payback of principle. We do this by using the
		present value of a lump sum formula.
		Begin by drawing out a time line.
	Matter - 3 - rate	What is the correct rate to use? In this problem we are told the bonds yield 12%. This is the common
		standard language for discussion of rates. The common language is to state rates in terms of
		annual percentages (APR). Because the bonds pay cash flow every six months (or two times per year)
		that means that the rate to use is 12/2 or 6%. The stated rate tells us about the cash flows.
		The stated rate may also be the yield rate, but sometimes these amounts are different. In this problem,
		the stated rate is less than the yield. When the stated rate is less than the yield rate, it means that
		investors in the market require a greater reward for taking on the risk of holding these bonds
		than the stated cash flow provides. Investors will pay less than the face value of the bond so that the
		yield is higher. These bonds are selling at a discount.
	Recording of the sale of bonds - the measurement base for long-term liabilities is present value. Once the initial value
	is determined, then the bonds stay at that amount and the bond discount or premium is amortized accordingly.
	(However, fair value is also an option for bonds.)
	The value of the bonds is a combination of the principle amount (held in one account) and the bond premium or discount
	(held in another account.)
	The interest expense each period reflects the yield rate, not the stated rate.

Amount