Question

On January 1, 2017, Franklin Company sold 11% bonds having a maturity value of $550,000 for $570,849, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Franklin Company allocates interest and unamortized discount or premium on the effective-interest basis.

1. List the journal entry at the date of the bond issuance (January 1, 2017)

2. List a schedule of interest expense and bond amortization for 2017–2019

Date		Cash Paid		Interest Expense		Premium Amortized		Carrying Amount of Bonds
1/1/17
12/31/17
12/31/18
12/31/19

3. List the journal entry to record the interest payment and the amortization for 2017 (December 31, 2017)

4. List the journal entry to record the interest payment and the amortization for 2019 (December 31, 2019)

Answer 1

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.

Credit Ans 1 Date Jan 1, 2017 Debit $5,70,849 Account Title Cash Premium on Bond Payable Bond Payable (To record issue of bond) $20,849 $5,50,000 Ans 2 Date Cash Paid Beginning Book Value (A) (B) = $550000x11% 1/1/17 31/12/17 31/12/18 31/12/19 Interest | Premium Closing Expense Amortised Book Value (C) (D) = (B)+(C) (A) + (D) - (B) $5,70,849 $57,085 $3,415 $5,67,434 $56,743 $3,757 $5,63,677 $56,368 $4,132 $5,59,545 $5,70,849 $5,67,434 $5,63,677 $60,500 $60,500 $60,500 Credit Debit $57,085 $3,415 $60,500 Date Account Title Ans 2 Dec 31, 2017 Interest Expense Premium on Bond Payable Cash (To record interest payment) Ans 3 Dec 31, 2019 Interest Expense Premium on Bond Payable Cash (To record interest payment) $56,368 $4,132 $60,500