Question

Strathern Corporation issued ten-year term bonds dated January 1, 2017, with a face value of $800,000. The face interest rate is 10 percent, and interest is payable annually  December 31. The bonds were issued for $708,400 to yield an effective annual rate of 12 percent. Use the effective interest method of amortization. Round answers to the nearest dollar.

a. Prepare entries in journal form without explanations to record the bond issue on January 1, 2017, and the payments of interest on  January, 2018 and January 2019.

Answer 1

Face value of the bonds Issue price of the bonds Discount on bonds issued $800,000 $708,400 $91,600 ($800000 - $708400] Interest Period Bond Amortization Table (Effective interest rate method) Interest Interest to be Bond's Expense @ Discount Unamortized paid Carrying 12% on amortized Discount ($800,000 x 10%) value Beg. Bond bal. (3) = (2)-(1) (4) = (4)-(3) (5)=(5)+(3) (2) $91,600 $708,400 $80,000 $85,008 $5,008 $86,592 $713,408 $80,000 $85,609 $5,609 $80,983 $719,017 (1) Issue Date 2)

Journal Entries: CREDIT $800,000 Date ACCOUNT TITLES AND EXPLANATION DEBIT January 1, 2017 Cash $708,400 Discount on bonds payable $91,600 Bonds Payable |(To record bonds issued at discount) January 1, 2018 Interest Payable $80,000 Cash (To record first interest payment on bonds payable) January 1, 2019 Interest Expense $80,000 Cash |(To record second interest payment on bonds payable) [$800000 x 10%] $80,000 [$800000 x 10%] $80,000 NOTES: Interest expense for Period 1 = $708400 x 12% = $85008; Unamortized discount = $91600 - $5008 = $86592; Interest expense for Period 2 = $713408 x 12% = $85609; Unamortized discount = $86592 - $5609 = $80983.

As the interest is payable in January only, respective year's accrued interest payable entry would have been recorded on Dec. 31st of respective years. The interest payable entries that would have been recorded on December 31, 2017 and 2018 would be (Ref: Amortization table presented above): CREDIT $5,008 $80,000 Datew ACCOUNT TITLES AND EXPLANATION DEBIT Dec. 31, 2017 Interest Expense $85,008 Discount on bonds payable Interest Payable |(To record bonds first accrued interest payable on bonds) Dec. 31, 2018 Interest Expense $85,609 Discount on bonds payable Interest Payable |(To record bonds second accrued interest payable on bonds) $5,609 $80,000