(Accounting for bonds, LO 3, 4) On August 1, 2004 Quilty Inc. (Quilty) issued an

$8,000,000 bond with a 9% coupon rate and a maturity date of July 31, 2010.

Interest will be paid semi-annually on July 31 and January 31. Quilty’s year end is December 31. The effective interest rate for a bond of this type on August 1, 2004 was 8%.

Required:

a. What will be the proceeds from the bond issue?

b. Prepare the journal entry to record issue of the bond on August 1, 2004.

c. Prepare an amortization schedule using both the straight-line and effective interest methods for any premium or discount that arose from the issue of the bond.

d. Prepare the journal entry required to accrue the interest expense and accrued interest payable on December 31, 2005. Make the entry for both the straightline and effective interest amortization methods.

e. Prepare the journal entry required to record the interest expense and the payment to investors on January 31, 2006. Make the entry for both the straightline and effective interest amortization methods.

f. Prepare the journal entry required to record the retirement of the bond on maturity. Include the interest expense and amortization of any bond premium or discount in the entry. Make the entry for both the straight-line and effective interest amortization methods.

g. On July 31, 2007, Quilty was able to buy back all the outstanding bonds on the open market for $7,250,000. Prepare the journal entry required to record early retirement of the bond.

h. Do you think that the decision to buy back the bonds early was a good decision? Explain.