Question

6. (12 points) At December 30, 2019 Apple had outstanding $2,000,000 of 3% bonds, interest payable annually on December 31. The bonds were sold to yield 4%. At December 30, 2019, the discount account had a balance of $104,843 before payment of interest. Make the December 31, 2019 journal entry for payment of interest and amortization of the discount using the effective interest method.

Answer 1

6.

Par value of bonds = $2,000,000

Unamortized bond discount = $104,843

Carrying value of bonds = Par value of bonds - Unamortized bond discount

= 2,000,000 - 104,843

= $1,895,157

Effective interest rate = 4%

Interest expense = Carrying value of bonds x Effective interest rate

= 1,895,157 x 4%

= $75,806

Cash payment for bond interest = Par value of bonds x Stated interest rate

= 2,000,000 x 3%

= $60,000

Amortization of bonds discount = Interest expense - Cash payment for bond interest

= 75,806 - 60,000

= $15,806

Journal

Date	Account Title and Explanation	Debit	Credit
Dec 31, 2019	Interest expense	75,806
	Discount on bonds payable		15,806
	Cash		60,000
	(To record interest expense)

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