Question

On the first day of its fiscal year, Ebert Company issued $23,000,000 of 5-year, 12% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 13%, resulting in Ebert receiving cash of $22,173,375. The company uses the interest method.

Journalize the entries to record the following:

Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

Cash	22173375
Discount on Bonds Payable	826625
Bonds Payable		23000000

First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

Interest Expense
Discount on Bonds Payable
Cash

Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

Interest Expense
Discount on Bonds Payable
Cash

Compute the amount of the bond interest expense for the first year. Round to the nearest dollar.

Annual interest paid        $____________

Discount amortized             ____________

Interest expenses for first year      $____________

Answer 1

Correct Answer:

Requirement 1:

	Dr	Cr
Interest Expense	$                      14,41,269
Discount on bonds payable		$                                       61,269
Cash		$                              13,80,000.0

Requirement 2:

	Dr	Cr
Interest Expense	$                      14,45,252
Discount on bonds payable		$                                       65,252
Cash		$                              13,80,000.0

Requirement 3:

	Dr	Cr
Annual interest paid	$                      27,60,000
Discount Amortised	$                         1,26,521
Interest Expenses for the first year		$                                 28,86,521

Working:

Effective Interest Amortization Table
Formula Used	(23,000,000*12%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (13%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
Date	cash paid	Interest Expense	Discount Amortized	Carrying value of Bond
		-	-	$          2,21,73,375
	$                      13,80,000	$                                 14,41,269	$                    61,269	$          2,22,34,644
	$                      13,80,000	$                                 14,45,252	$                    65,252	$          2,22,99,896

End of answer.

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