Question

Legacy issues $590,000 of 7.5%, four-year bonds dated January 1, 2019, that pay interest semiannually on June 30 and December 31. They are issued at $542,310 when the market rate is 10%.

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.

Journal entry worksheet Record the issue of bonds with a par value of $590,000 on January 1 at an issue price of $542,310. Note: Enter debits before credits. General Journal Debit Credit Date January 01

Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
Jan 1,2019	Cash	$542,310
	Discount on bonds payable	$47,690
	Bonds payable		$590,000
	[To record issuance of bonds]

Requirement 2:

Total bond interest expense over life of bonds:
Amount repaid:
8 payments of $22,125	$177,000
Par value at maturity	$590,000
Total repaid	$767,000
(Less): Amount borrowed	($542,310)
Total bond interest expense	$224,690

Requirement 3:

Semi-annual Interest Period-End	Cash interest Paid	Bond Interest Expense	Discount Amortization	Unamortized Discount	Carrying value
01/01/2019				$47,690	$542,310
06/30/2019	$22,125	$27,116	$4,991	$42,700	$547,301
12/31/2019	$22,125	$27,365	$5,240	$37,459	$552,541
06/30/2020	$22,125	$27,627	$5,502	$31,957	$558,043
12/31/2020	$22,125	$27,902	$5,777	$26,180	$563,820

Cash interest paid = $590,000 x 7.5% x (6/12) = $22,125

Bond interest expense = Preceding carrying value x 10% x (6/12)

Discount amortization = Bond interest expense - Cash interest

Unamortized discount = Preceding unamortized discount - Discount amortized

Carrying value = Preceding carrying value + Discount amortized

Requirement 4:

Date	Account title and Explanation	Debit	Credit
June 30,2019	Interest expense	$27,116
	Discount on bonds payable		$4,991
	Cash		$22,125
	[To record first interest payment]
Dec 31,2019	Interest expense	$27,365
	Discount on bonds payable		$5,240
	Cash		$22,125
	[To record second interest payment]