On January 1, 2012, Quinton Corporation
issued $600,000 of 7% bonds that are due in 10 years. The bonds were issued for
$559,229 and pay interest each July 1 and January 1. The company uses the
effective interest method. Assume an effective rate of 8%.
(a) Prepare the company’s journal entry
for the January 1 issuance.
(b) Prepare the company’s journal entry
for the July 1 interest payment.
(c) Prepare the company’s December 31
adjusting entry.
(d) Assume that the effective interest
of 8% was not given in the data. Prove the effective interest rate of 8% using
a financial calculator or computer spreadsheet function.
(e) Prepare the first three payments of
an effective-interest amortization table for the bonds.
|
(a)
|
Cash ...............................................................................................
|
559,229
|
|
|
|
|
Bonds Payable...................................................................
|
|
559,229
|
|
|
|
|
|
|
|
|
(b)
|
Interest
Expense.............................................................................
|
22,369
|
|
|
|
|
Cash.....................................................................................
|
|
21,000
|
|
|
|
Bonds Payable...................................................................
|
|
1,369
|
|
|
|
|
|
|
|
|
(c)
|
Interest
Expense.............................................................................
|
22,424
|
|
|
|
|
Interest Payable..................................................................
|
|
21,000
|
|
|
|
Bonds Payable...................................................................
|
|
1,424
|
|
(d)
Using a Financial Calculator:
|
FV =
|
(600,000)
|
|
Given
|
|
n =
|
20
|
|
10 years X 2
|
|
PMT =
|
(21,000)
|
|
Face X 7% X 6/12
|
|
i =
|
4.0%
|
|
Calculate
|
|
PV =
|
559,229
|
|
Given
|
|
(e)
Schedule of Discount Amortization
|
|
Effective
Interest Method (4%)
|
|
|
|
|
3.5%
|
|
4.0%
|
|
|
|
|
|
|
Cash
|
|
Interest
|
Discount
|
Carrying
|
|
Date
|
|
|
Paid
|
|
Expense
|
Amortized
|
Amount
|
|
Jan. 1
|
2012
|
|
|
|
|
|
$559,229.00
|
|
July 1
|
2012
|
|
$21,000.00
|
|
$22,369.16
|
$1,369.16
|
560,598.16
|
|
Jan. 1
|
2013
|
|
21,000.00
|
|
22,423.93
|
1,423.93
|
562,022.09
|
|
July 1
|
2013
|
|
21,000.00
|
|
22,480.89
|
1,480.89
|
563,502.97
|
