Can anyone explain the solution for question 7?
Bond Schedule Tab Information
On January 1, 20×1, Debue issued $100,000 of 7% debentures. The bonds will mature on December 31, 20×5. Interest on the bonds is paid each December 31. The yield rate of interest on January 1, 20×1 was 6%. A partial bond amortization schedule appears below. The single integers indicate cells pertaining to a question below the schedule.
Date Cash Interest Interest Expense Premium Amortization Unamortized Premium Net Bond Liability
1/1/x1 4,213 104,213
12/31/x1 1 2 3 4 5
12/31/x2 6
12/31/x3
12/31/x4 7
12/31/x5
Totals 8
Answer ten questions about Debue's bond issue. The first eight questions are to determine the amounts that would appear in the eight numbered spreadsheet cells above.
The last two questions appear below and use the same information from the table above. Enter your amounts in the second column of the spreadsheet below rounded to nearest dollar. Present value of $1 for 1 year: at 6%, 0.94340; at 7%, .93458.
#9. Assume on 1/1/x2, Debue retires 30% of the bond issue at 100. The firm incurred $3,000 of bond issue costs when the bonds were issued. Compute the gain on retirement of the 30% of the bond issue.
#10. Compute the net bond liability on 1/1/x3 assuming Debue instead uses the straight-line method.
#11. In the journal entry dated 12/31/x2, what is the amount of the debit to bond premium under the effective interest method?
#12. In the journal entry dated 12/31/x2, what is the amount of the debit to bond premium under the straight-line method?
Rationale:
#1. $7,000 = .07($100,000)
#2. $6,253 = .06($104,213)
#3. $747 = $7,000 – $6,253
#4. $3,466 = $4,213 – $747
#5. $103,466 = $104,213 – $747 = $100,000 + $3,466
#6. $6,208 = .06($103,466)
#7. $100,944 = $107,000(.9434)
#8. $30,787 = $7,000(5) – $4,213
#9. Book value of bonds retired = .30($100,000 + $3,466) = $31,040. Book value of bond issue costs written off (reduces gain) = .30($3,000)(4/5 term remaining) = $720. Gain = $31,040 – $30,000 cash paid – $720 = $320.
#10. $100,000 + $4,213(3/5) = $102,528
#11. The amortization of the premium is the difference between the cash interest payment ($7,000) and the interest expense recognized on that date ($6,208), or $792.
#12. The SL method amortizes the same amount of premium each year, which is $843 ($4,213/5).
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