Unifying Concepts: Accounting for Bonds Payable
Response to the following problem:
Gonzalez Corporation was authorized to issue $100,000 of 7%, four-year bonds, dated May 1, 2009. All the bonds were sold on that date when the effective interest rate was 8%. Interest is payable on May 1 and November 1 each year. The company follows a policy of amortizing premium or discount using the effective-interest method. The company closes its books on December 31 of each year.
Required:
1. Calculate the issuance price of the bonds.
2. Prepare an amortization schedule that covers the life of the bond.
3. Prepare journal entries at the following dates based on the information shown in the amortization schedule prepared for part (2).
a. December 31, 2009.
b. May 1, 2010.
c. November 1, 2010.
d. December 31, 2010.
4. Based on the journal entries prepared for part (3), how much interest expense related to this bond issue did the company report on its income statement for the year 2010?
5. What was the carrying value of this bond issue on the balance sheet of the company at December 31, 2010?
6. Interpretive Question: Explain why another company in the same industry, which issued bonds with the same amount of face value, the same date of issuance, and the same stated rate of interest, might have had an issuance price of more or less than the price you computed for the issuance of the Gonzalez Corporation bonds.