Problem 1 Comprehensive Bond Problem

On January 1, 2016, Dudley Company issued $800,000 of five-year, 6% face value bonds that pay interest semi-annually each June 30 and December 31. The bonds were issued to yield an 8% return.

Required:

1. a. Prepare the journal entry to record the issuance of the bond.

b. Prepare an amortization table for all years of the bonds life to record the amortization of the premium or discount, using the effective interest method.

c. Prepare the journal entry for the first two interest payments, assuming that Dudley uses the effective-interest method to amortize the premium or discount. (Your figures will come from the amortization table).

d. Prepare the journal entry for the first interest payment, assuming that Dudley uses the straight-line method to amortize the premium or discount.

e. Assume that, on December 31, 2018, Dudley redeemed all of the outstanding bonds at 103. Prepare the journal entries for this transaction. Use your amortization tables to help you determine the carrying value of the bond at the time of redemption.

2. Repeat requirements 1a through 1d assuming that the bonds issued had a stated rate of 10% instead of 6%. (The yield is still 8%).

3. Looking at your amortization tables for both scenarios, does your INTEREST EXPENSE increase or decrease each period when you amortize a discount? What about when you amortize a premium?

4. Looking at your amortization tables for both scenarios, does your CARRYING VALUE increase or decrease each period when you amortize a discount? What about when you amortize a premium?

5. Looking at your amortization tables for both scenarios, what do you notice about the AMOUNT OF AMORTIZATION (the difference between your interest paid and the interest expense) each period? Does it increase or decrease each period when amortizing a discount? What about when you are amortizing a premium?

6. Looking at your amortization table, when amortizing a premium using the effective interest method, is your interest expense in the earlier years greater than or less than it is when amortizing your premium using the straight-line method? What about in later years?

7. Looking at your amortization table, when amortizing a discount using the effective interest method, is your interest expense in the earlier years greater than or less than it is when amortizing your discount using the straight-line method? What about in later years?