A part of the future cash flows is recorded as

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PROBLEMSPr. 14-69—Bond discount amortization.On June 1, 2004, Janson Bottle Company sold $1,000,000 in long-term bonds for $877,600. Thebonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. Thebonds pay interest annually on May 31 of each year. The bonds are to be accounted for under theeffective interest method.Instructions(a)Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.)(b)The sales price of $877,600 was determined from present value tables. Specifically explain how one would determine the price using present value tables.(c) Assuming that interest and discount amortization are recorded each May 31, prepare theadjusting entry to be made on December 31, 2006. (Round to the nearest dollar.)Solution 14-69
(b)(1)Find the present value of $1,000,000 due in 10 years at 10%.(2)Find the present value of 10 annual payments of $80,000 at 10%.Add (1) and (2) to obtain the present value of the principal and the interest payments.14 - 24
—Bond interest and discount amortization.Logan Corporation issued $600,000 of 8% bonds on October 1, 2004, due on October 1, 2009.The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10%effective annual interest. Logan Corporation closes its books annually on December 31.Instructions(a)Complete the following amortization schedule for the dates indicated. (Round all answers tothe nearest dollar.) Use the effective interest method.
(b)Prepare the adjusting entry for December 31, 2005. Use the effective interest method.(c) Compute the interest expense to be reported in the income statement for the year endedDecember 31, 2005.Solution 14-70

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