Question

Chowan Corporation issued $154,000 of 7% bonds dated January 1, 2016, for $148,815.79 on January 1, 2016. The bonds are due December 31, 2019, were issued to yield 8%, and pay interest semiannually on June 30 and December 31. Chowan uses the effective interest method of amortization.

Required:

Prepare the journal entries to record the issue of the bonds on January 1, 2016, and the interest payments on June 30, 2016, December 31, 2016, and June 30, 2017. In addition, prepare a bond interest expense and discount amortization schedule for the bonds through June 30, 2017.

Chowan Corporation issued $154,000 of 7% bonds dated January 1, 2016, for $148,815.79 on January 1, 2016. The bonds are due December 31, 2019, were issued to yield 8%, and pay interest semiannually on June 30 and December 31. Chowan uses the effective interest method of amortization.

Required:

Prepare the journal entries to record the issue of the bonds on January 1, 2016, and the interest payments on June 30, 2016, December 31, 2016, and June 30, 2017.

1. Prepare the journal entries to record the issue of the bonds on January 1, 2016, and the interest payments on June 30, 2016, December 31, 2016, and June 30, 2017.

Additional Information: 12 lines for the general journal and round to two decimals

2. prepare a bond interest expense and discount amortization schedule for the bonds through June 30, 2017.

CHOWAN CORPORATION

Bond Interest Expense and Discount Amortization Schedule (Partial)

Effective Interest Method 7% Bonds Sold to Yield 8%

Answer 1

Ans 1 Journal Entry Date Jan 1, 2016 $1,54,000.00 Jun 30, 2016 $562.63 $5,390.00 Account Title Debit Credit Cash $1,48,815.79 Discount on Bond Payable $5,184.21 Bond Payable (To record issuance of bond at discount) Interest Expense $5,952.63 Discount on Bond Payable Cash (To record interest payment and discount amortisation) Interest Expense $5,975.14 Discount on Bond Payable Cash (To record interest payment and discount amortisation) Interest Expense $5,998.54 Discount on Bond Payable Cash (To record interest payment and discount amortisation) Dec 31, 2016 $585.14 $5,390.00 Jun 30, 2017 $608.54 $5,390.00 Ans 2 Amortisation Schedule The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised. Interest Expense Amortisation of Bond Discount (D)= (C)-(B) Amortisation schedule (Effective Interest Method) Cash Payment Date Opening book Balance $154000 x 3.50% (A) Jan 1, 2016 Jun 30, 2016 $1,48,815.79 $5,390.00 Dec 31, 2016 $1,49,378.42 $5,390.00 Jun 30, 2017 $1,49,963.56 $5,390.00 (B) (C)=(A) x 4% Closing Book Value (A)+(C)-(B) $1,48,815.79 $1,49,378.42 $1,49,963.56 $1,50,572.10 $5,952.63 $5,975.14 $5,998.54 $562.63 $585.14 $608.54