Question

On February 1, 2018, Debbie Inc. issued 8% bonds dated February 1, 2018, with a face amount of $250,000. The bonds mature in 20 years and sold at an effective interest rate of 10%. Interest is paid semiannually on July 31 and January 31. Debbie’s fiscal year is the calendar year. Wolf uses the effective interest method of amortization.

1. Calculate the issuing price of the bonds

2. Prepare journal entries for 2018 using the effective-interest method

3. Compute the interest expense for the year ended, December 31, 2021

4. Prepare the journal entry for January 31, 2019

Answer 1

1.	Issuing price of bonds	$207,102
2.	Account titles and explanation	Debit	Credit
01-Feb-18	Cash	$207,102
	Discount on bonds payable	$42,898
	Bonds payable		$250,000
	(bonds issued)
31-Jul-18	Interest expense	$10,355
	Cash		$10,000
	Discount on bonds payable		$355
	(interest recognised)
31-Dec-18	Interest expense	$8,644		(10373*5/6)
	Interest payable		$8,644	(10373*5/6)
3.	Interest expense for the year ended Dec. 31, 2021 =			(10453*1/6+10476+10500*5/6)
				$20,968
4.
31-Jan-19	Interest expense	$1,729		(10373*1/6)
	Interest payable	$8,644
	Cash		$10,000
	Discount on bonds payable		$373

Period m+nO 00 12 12 13 16 19 Cashflows Present value Calculation 1 $10,000 $9,524 (10000/(1+0.05)^1) $10,000 $9,070 (10000/(1+0.05)^2) $10,000 $8,638 (10000/(1+0.05)^3) $10,000 $8,227 (10000/(1+0.05)^4) $10,000 $7,835 (10000/(1+0.05)45) $10,000 $7,462 (10000/(1+0.05)^6) $10,000 $7,107 (10000/(1+0.05)^7) 8 $10,000 $6,768 (10000/(1+0.05)*8) 9 $10,000 $6,446 (10000/(1+0.05)^9) 10 $10,000 $6,139 (10000/(1+0.05)-10) 11 $10,000 $5,847 (10000/(1+0.05)-11) $10,000 $5,568 (10000/(1+0.05)-12) $10,000 $5,303 (10000/(1+0.05)-13) $10,000 $5,051 (10000/(1+0.05)-14) 15 $10,000 $4,810 (10000/(1+0.05)-15) $10,000 $4,581 (10000/(1+0.05)-16) 17 $10,000 $4,363 (10000/(1+0.05)^17) 18 $10,000 $4,155 (10000/(1+0.05)-18) $10,000 $3,957 (10000/(1+0.05)-19) $10,000 $3,769 (10000/(1+0.05)^20) 21 $10,000 $3,589 (10000/(1+0.05)^21) 22 $10,000 $3,418 (10000/(1+0.05)^22) $10,000 $3,256 (10000/(1+0.05)^23) $10,000 $3,101(10000/(1+0.05)^24) $10,000 $2,953 (10000/(1+0.05)^25) $10,000 $2,812 (10000/(1+0.05)-26) $10,000 $2,678 (10000/(1+0.05)^27) $10,000 $2,551 (10000/(1+0.05)^28) 29 $10,000 $2,429 (10000/(1+0.05)^29) 30 $10,000 $2,314 (10000/(1+0.05)^30) $10,000 $2,204(10000/(1+0.05)^31) $10,000 $2,099 (10000/(1+0.05)^32) 33 $10,000 $1,999 (10000/(1+0.05)^33) $10,000 $1,904 (10000/(1+0.05)^34) $10,000 $1,813 (10000/(1+0.05)^35) $10,000 $1,727 (10000/(1+0.05)^36) 37 $10,000 $1,644 (10000/(1+0.05)^37) 38 $10,000 $1,566 (10000/(1+0.05)^38) 39 $10,000 $1,491 (10000/(1+0.05)^39) 40 $260,000 $36,932 (260000/(1+0.05)440) $207,102 Amortization Schedule Period Cash paid Interest Closing bal. 01-Feb-18 0 $0 $207,102 31-Jul-18 $10,000 $10,355 $207,457 31-Jan-19 $10,000 $10,373 $207,830 31-Jul-19 $10,000 $10,392 $208,222 31-Jan-20 $10,000 $10,411 $208,633 31-Jul-20 $10,000 $10,432 $209,065 31-Jan-21 $10,000 $10,453 $209,518 31-Jul-21 $10,000 $10,476 $209,994 31-Jan-22 $10,000 $10,500 $210,493 $10,000 $10,525 $211,018 10 $10,000 $10,551 $211,569 $10,000 $10,578 $212,147 $10,000 $10,607 $212,755 $10,000 $10,638 $213,392 $10,000 $10,670 $214,062 $10,000 $10,703 $214,765 $10,000 $10,738 $215,503 $10,000 $10,775 $216,279 $10,000 $10,814 $217,092 $10,000 $10,855 $217,947 $10,000 $10,897 $218,844 $10,000 $10,942 $219,787 $10,000 $10,989 $220,776 $10,000 $11,039 $221,815 $10,000 $11,091 $222,906 $10,000 $11,145 $224,051 $10,000 $11,203 $225,253 $10,000 $11,263 $226,516 $10,000 $11,326 $227,842 $10,000 $11,392 $229,234 $10,000 $11,462 $230,696 $10,000 $11,535 $232,230 $10,000 $11,612 $233,842 $10,000 $11,692 $235,534 $10,000 $11,777 $237,311 $10,000 $11,866 $239,176 $10,000 $11,959 $241,135 $10,000 $12,057 $243,192 $10,000 $12,160 $245,351 $10,000 $12,268 $247,619 40 $260,000 $12,381 26 27 36 36 38 $0