Comprehensive
Response to the following problem:
The Wilkerson Corporation issued $1 million of 13.5% bonds for $985,071.68. The bonds are dated and issued October 1, 2010, are due September 30, 2014, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%.
Required:
1. Prepare a bond interest expense and discount amortization schedule using the straight-line method.
2. Prepare a bond interest expense and discount amortization schedule using the effective interest method.
3. Prepare adjusting entries for the end of the fiscal year December 31, 2010 using:
a. The straight-line method of amortization
b. The effective interest method of amortization
4. If income before interest and income taxes of 30% in 2011 is $500,000, compute net income under each alternative.
5. Assume the company retired the bonds on June 30, 2011 at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using:
a. The straight-line method of amortization
b. The effective interest method of amortization
6. Compute the company's times interest earned (pretax operating income divided by interest expense) under each alternative.