Question

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Problem 10-8AB Effective Interest: Amortization of bond discount LO P1, P5 Legacy issues $550,000 of 9.5%, four-year bonds dated January 1, 2018, that pay interest semiannually on June 30 and December 31. They are issued at $507,301, and their market rate is 12% at the issue date. Required: 1. Prepare the January 1, 2018. 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 journal entries to record the first two interest payments. View transaction list Journal entry worksheet < Prev 4 of 5 !!! Next >

Answer 1

$550,000 ($507,301) $42,699 Ans 1 Face Value of Bond Less: Proceeds from issue Discount on issue of bond Journal Entry Date Account Title Jan 1, 2018 Cash Discount on Bond Payable Bond Payable (To record issue of bond) Credit Debit $507,301 $42,699 $550,000 Ans 2 Total Bond Interest Expense Over Life of Bond: Amount repaid 8 payment of ($55000 x 9.5%)/12 x 8] Par Value at maturity Total Repaid Less: amount borrowed Total Bond Interest Expense $209,000 $550,000 $759,000 ($507,301) $251,699

Ans 3 Effective Interest Amortisation Table The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher as compared bond coupon rate then, the bonds were issued at a discount. The Discount 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 which will be amortised. Semi-annual Cash Interest Discount Unamortised interest Paid [($550000 x Bond Interest Expense Carrying Value Amortisation Discount Period end 9.5%)/2] (B)-(A) 1-Jan-18 $42,699 $507,301 30-Jun-18 $26,125 [$507301 x 12%/2] $30,438 $4,313 $38,386 $511,614 31-Dec-18 $26,125 [$511614 x 12%/2] $30,697 $4,572 $33,814 $516,186 30-Jun-19 $26,125 [$516186 x 12%/2] $30,971 $4,846 $28,968 $521,032 31-Dec-19 $26,125 ($521032 x 12%/2] $31,262 $5,137 $23,831 $526,169 (A) (B) Ans 4 Credit $4,313 $26,125 Journal Entry Date Account Title Debit 30-Jun-18 Bond Interest Expense $30,438 Discount on Bond Payable Cash (To record interest payament and disocunt amortisation) 1-Dec-18 Bond Interest Expense $30,697 Discount on Bond Payable Cash (To record interest payament and disocunt amortisation) $4,572 $26,125