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## *EXERCISE 10-12

Purpose: (L.O. 10) This exercise will illustrate the computations and journal entries for a bond when the effective-interest method of amortization is used.

The Jan Larsen Corporation issued bonds with the following details:

 Face value \$100,000.00 Contractual interest rate 7% Market interest rate 10% Maturity date January 1, 2017 Date of issuance January 1, 2014 Issuance price \$92,539.95 Interest payments due Annually on January 1 Method of amortization Effective-interest End of annual reporting period December 31

Instructions

• (a) Complete the amortization schedule for these bonds which appears below.
• (b) Prepare the journal entries to record:
• (1) The issuance of the bonds on January 1, 2014.
• (2) The adjusting entry(s) at December 31, 2014.
• (3) The payment entry on January 1, 2015. (Assume reversing entries are not used.)

SOLUTION TO EXERCISE 10-12

Explanation: Interest to be paid (stated interest) is determined by multiplying the face value (\$100,000) by the contractual interest rate (7%). Interest expense is computed by multiplying the carrying value at the beginning of the interest period by the effective-interest rate (10%). The amount of discount amortization for the period is the excess of the interest expense over the stated interest ...

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