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Mellilo Corporation issued $5 million of 20-year, 9.5 percent bonds on July 1,2011, at 98. Interest 30, 2031. Mellilos fiscal year ends on December 31. Prepare the following journal entries: a. July 1, 2011, to record the issuance of the bonds b. December 31, 2011, to pay interest and amortize the bond discount. c. June 30, 2031, to pay interest, amortize the bond discount, and retire the bonds at maturity s is due on June 30 and December 31 of each year, and all of the bonds in the issue mature on June (make two separate entries). explain the effect of amortizing the bond discount upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects.) makore Dollor amounts are stated in
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16 Date 17 2011 18 1-Jul Cash 19 20 Account Titles & Explanation Debit Credit 4,900,000 100,000 Discount on Bonds payable Bonds Payable (to record issue of Bonds) 5,000,000 24 25 Interest to be Paid @4.75% on Face Value ( 1) Interest Expense @ 4.87% on Carrying Value (2) Date Amortization Carry value (4) 1-Jul 27 31-Dec 1-Jul 29 31-Dec 1-Jul 31 31-Dec 1-Jul 33 31-Dec 1-Jul 35 31-Dec 1-Jul 37 31-Dec 1-Jul 39 31-Dec 1-Jul 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 237,500 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 4,900,000 4,902,500 4,905,000 4,907,500 4,910,000 4,912,5010 4,915,000 4,917,500 4,920,000 4,922,5010 4,925,000 4,927,500 4,930,000 4,932,5010 4,935,000 28 30 32 34. 36 38 400257 257 22222222222222222222222! 1 1 1 1 42 43 44 5 6 7 8 9 50 5 5 5 54 5 6 7 8 9 60 623 64 651-Jul 237,500 240,000 2,500 5,000,000 As nothing is mentioned In the question I have amortized the bonds by straight line method 69 70 31-Dec Interest expense 71 72 73 74 75 76 30-Jun Interest expense 240,000 2,500 237,500 Discount on Bonds Payable Cash (To record payment of Interest) 2031 240,000 2,500 237,500 Discount on Bonds Payable Cash 78 79 80 81 30-Jun Bonds Payable 82 83 84 85 d. Briefly explain the effect of amortizing the bond discount upon (1) annual net income and 86 (2) annual net cash flow from operating activities. (lgnore possible income tax effects.) 87 88 1 89 2) (To record payment of Interest) 5,000,000 Cash 5,000,000 (To record payment made on maturity) Discount Amortization increases annual interest expense which in result reduces annual net income As amortization of bond is a non cash component of interest expense it will have no effect on cash flow from operating activity

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