Question

Problem 10-8AB Effective Interest: Amortization of bond discount LO P5 Legacy issues $710,000 of 8.0%, four-year bonds dated January 1, 2019, that pay interest semiannually on June 30 and December 31 They are issued at $621,812 when the market rate is 12%. Required: 1. Prepare the January 1 journal entry to record the bonds' issuance. 2. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life. 3. Prepare an effective interest amortization table for the bonds' first two years. 4. Prepare the journal entries to record the first two interest payments. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare the January 1 journal entry to record the bonds' issuance. View transaction list Journal entry worksheet Record the issue of bonds with a par value of $ 710,000 on January 1 at an issue price of $621,812. Note: Enter debits before credits. General Journal Debit Credit Date January 01 Record entry Clear entry View general journal < Required 1 Required 2 >

Answer 1

Solution

Legacy

1. Entry to record bond’s issuance:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2019	Cash	$621,812
	Discount on Bonds Payable		$88,188
	Bonds Payable		$710,000
	(To record bond issuance and discount)
	Computations: Discount on issue of bonds = face value – issue price = 710,000 – 621,812 = $88,188

2. Calculation of bond interest expense:

Semi-annual interest expense = 710,000 x 8% x 6/12 = $28,400

Amount Repaid:
8	payments of	$28,400	$227,200
	par value at maturity		$710,000
	total repaid		$937,200
	Less: amount borrowed		$621,812
	Total bond interest expense		$315,388

3. Effective interest amortization table for the bond’s first two years:

Date	Cash Paid	Interest Expense	Discount Amortization	Carrying Value of Bond
Jan 1, 2019	-	-	-	$621,812
June 30, 2019	$28,400	$37,308	$8,909	$630,721
Dec 31, 2019	$28,400	$37,843	$9,443	$640,164
June 30, 2020	$28,400	$38,410	$10,010	$650,174
Dec 31, 2020	$28,400	$39,010	$10,610	$660,784
June 30, 2021	$28,400	$39,647	$11,247	$672,031
Dec 31, 2021	$28,400	$40,322	$11,922	$683,953
June 30, 2022	$28,400	$41,037	$12,637	$696,590
Dec 31, 2022	$28,400	$41,795	$13,395	$709,985

Computations:

Interest expense for each semi-annual period is computed as follows,

Interest expense = carrying value of bond x market rate of interest x 6/12

June 30, 2019 = 621,812 x 12% x 6/12 = $37,308

Discount amortization = interest expense – cash paid = 37,308 – 28,400 = $8,909

Carrying value of bond = beg. Balance + discount amortized

= 621,812 + 8,909 = $630,721

Total interest expense = $315,372

Total cash paid = $227,200

Total discount amortization = $88,173

4. Entries to record the first two interest payments:

Date	Account Titles and Explanation	Debit	Credit
June 30, 2019	Interest Expense	$37,308
	Discount on Bonds Payable		$8,908
	Cash		$28,400
	(To record first interest payment)
Dec 31, 2019	Interest Expense	$37,843
	Discount on Bonds Payable		$9,443
	Cash		$28,400
	(To record second interest payment)