Reference no: EM132751721

On August 1, 2020, Fitzgerald Inc. sold 1000 bonds, having a maturity value of $1,000 each and 5% interest. The bonds were sold at 97. Bond issue costs of $45,300 were incurred. The effective interest rate was 7.2% including the issue costs. The bonds are dated August 1, 2020 and mature on August 1, 2024, with interest payable on August 1 and February 1 of each year. Fitzgerald uses the amortized cost method using the effective interest method to amortize the bond premium or discount. Fitzgerald prepares financial statements annually at December 31.

Problem (a) Prepare the journal entry at the date of issue of the bonds.

Problem (b) Prepare the bond amortization schedule for the bond through to its maturity date of August 1, 2024.

Problem (c) Prepare the other required journal entries relating to the bond for all of 2020 and Feb 1, 2021.

Problem (d) On Feb 2, 2021, all bonds were repurchased from the Bondholders by Fitzgerald at the callable provision of 101 and retired. Prepare the journal entry to record the repurchase and retirement of these bonds.

Problem (e) Assume instead that Fitzgerald follows ASPE and chooses to amortize the premium or discount using the straight-line method.

i. Prepare the Dec 31, 2020 year end adjusting entry.
ii. Is the interest expense for 2020 higher or lower using the straight-line method?