Bond Amortization, Uncollectible Accounts, and Depreciation
Bond Issuance and Amortization
Ashley Addison Company issued $600,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the effective interest method is used for amortization. The market rate is 8%. The bonds are issued on the date of the bonds.
- Amount received for the bonds? $648,000 (600,000 * 1.08)
- Interest paid each interest period? $60,000 (600,000 * 0.10)
- Premium amortization for the first interest period? $8,160 [60,000 – (648,000 * 0.08)]
- Bond interest expense recorded on first interest date? $51,840 (648,000 * 0.08)
- Carrying value of the bonds after the first interest date? $639,840 (648,000 – 8,160)
- Premium amortization second interest period? $8,812.80 (60,000 – 51,187.20)
- Bond interest expense recorded second interest date? $51,187.20 (648,000 – 8,160) * 0.08
Renfro Company issued $500,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the straight-line method is used for amortization. The market rate is 7%. The bonds are issued on the date of the bonds.
- Amount received for the bonds? $510,000 (500,000 * 1.02)
- Interest paid each interest period? $40,000 (500,000 * 0.08)
- Premium amortization for the first interest period? $1,000 (510,000 – 500,000) / 10
- Bond interest expense recorded on the first interest date? $39,000 (40,000 – 1,000)
- Carrying value of the bonds after the first interest date? $509,000 (510,000 – 1,000)
Uncollectible Accounts
Media Markt Computer uses the allowance method for uncollectible accounts. Past experience indicates that 5% of accounts receivable will be uncollectible.
Selected account balances:
| 2016 | 2017 | |
|---|---|---|
| Net Credit Sales | $400,000 | $500,000 |
| Accounts Receivable | $80,000 | $100,000 |
| Allowance for Doubtful Accounts | $4,000 | ? |
Transactions:
- Aug. 10: Allowance for doubtful accounts $700; Accounts Receivable-Kurt West $700
- Sept. 12: Allowance for doubtful accounts $3,000; Accounts Receivable-Jill Lynch $3,000
- Oct. 10: Accounts receivable-Kurt West $300; Allowance for doubtful accounts $300; Cash $300; Accounts Receivable-Kurt West $300
- Dec. 31: Bad debts expense $4,400; Allowance for doubtful accounts $4,400
Bad debts expense calculation: (100,000 * 5%) – 600 = 4,400
Allowance for doubtful accounts balance at December 31, 2017: $5,000 (100,000 * 5%).
Depreciation
Equipment A
Percentage: 0.25
PERIOD | BEG. VA | DEP. | AC. DEP | NBV |
2015 | 100,000 | 12,500 | 12,500 | 87,500 |
2016 | 87,500 | 21,875 | 34,375 | 65,625 |
2017 | 65,625 | 8,203.13 | 42,578.13 | 57,421.87 |
INTERIM DEPRECIATION
Dep. exp … 8,203.13
Ac. dep 8,203.13
Cash … 43,000
Ac. dep … 42,578.13
Loss on disposal … 14,421.87
Equipment 100,000
Equipment B
Percentage: 0.4
PERIOD | BEG. VALUE | DEP. | AC. DEP | NBV |
2015 | 63,000 | 25,200 | 25,200 | 37,800 |
2016 | 37,800 | 15,120 | 40,320 | 22,680 |
2017 | 22,680 | 6,048 | 46,368 | 16,632 |
INTERIM DEPRECIATION
Dep. exp … 6,048
Ac. dep 6,048
Cash … 18,000
Ac. dep … 46,368
Equipment 63,000
Gain on disposal 1,368