During 2014 and 2015, Cook Co. completed the following transactions relating to its bond issue. The companyâs fiscal year ends on December 31.

2014

Mar. 1
Issued $360,000 of eight-year, 5 percent bonds for $348,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014.

Sept. 1
Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

Dec. 31 Recognized accrued interest expense including the amortization of the discount.

2015

Mar. 1
Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

Sept. 1
Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.

Dec. 31 Recognized accrued interest expense including the amortization of the discount.

Required

a-1.
When the bonds were issued, was the market rate of interest more or less than the stated rate of interest?

More

Less

a-2.
If the bonds had sold at face value, what amount of cash would Cook Co. have received?

b.
Prepare the liabilities section of the balance sheet at December 31, 2014 and 2015.

c.
Determine the amount of interest expense Cook would report on the income statements for 2014 and 2015.

d.
Determine the amount of interest Cook would pay to the bondholders in 2014 and 2015.

Question

During 2014 and 2015, Cook Co. completed the following transactions relating to its bond issue. The companyâs fiscal year ends on December 31.

2014
Mar.	1	Issued $360,000 of eight-year, 5 percent bonds for $348,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2014.
Sept.	1	Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec.	31	Recognized accrued interest expense including the amortization of the discount.

2015
Mar.	1	Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Sept.	1	Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec.	31	Recognized accrued interest expense including the amortization of the discount.

Required

a-1.

When the bonds were issued, was the market rate of interest more or less than the stated rate of interest?

	More
	Less

a-2.	If the bonds had sold at face value, what amount of cash would Cook Co. have received?

b.	Prepare the liabilities section of the balance sheet at December 31, 2014 and 2015.

c.	Determine the amount of interest expense Cook would report on the income statements for 2014 and 2015.

d.	Determine the amount of interest Cook would pay to the bondholders in 2014 and 2015.

General Journal
Date	Description	Debit	Credit
a.)
Dec.31	Cash	$Answer	$Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	To record issuance of bonds.
b.
Jun.30	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense.	Answer	Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense.	Answer	Answer
	Cash	Answer	Answer
	To record semiannual interest payment and discount amortization.
c.)
Dec.31	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	Answer: Cash, Discount on Bonds Payable, Bonds Payable, Bond Interest Expense	Answer	Answer
	Cash	Answer	Answer
	To record semiannual interest payment.

Year 1
July	1	Issued $58,800,000 of 20-year, 11% callable bonds dated July 1, Year 1, at a market (effective) rate of 13%, receiving cash of $50,482,396. Interest is payable semiannually on December 31 and June 30.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
Year 2
June	30	Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 is combined with the semiannual interest payment.
Dec.	31	Paid the semiannual interest on the bonds. The bond discount amortization of $207,940 is combined with the semiannual interest payment.
	31	Closed the interest expense account.
Year 3
June	30	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $7,485,844 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)

1.	Journalize the entries to record the transactions. Round all amounts to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles.
2.	Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
3.	Determine the carrying amount of the bonds as of December 31, Year 2.

Year 1
July 1.	Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semiannually on December 31 and June 30.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined with the semiannual interest payment.
31.	Closed the interest expense account.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined with the semiannual interest payment..
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined with the semiannual interest payment.
31.	Closed the interest expense account.
Year 3
June 30.	Recorded the redemption of the bonds, which were called at 103. The balance in the bond premium account is $6,253,632 after payment of interest and amortization of premium have been recorded. (Record the redemption only.)

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