Question

Bond Discount, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Discount

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $32,000,000 of 20-year, 11% bonds at a market (effective) interest rate of 14%, receiving cash of $25,601,920. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

For all journal entries: For a compound transaction, if an amount box does not require an entry, leave it blank.

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

Year 1, July 1	Cash
	Discount on Bonds Payable
	Bonds Payable

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Year 1, Dec. 31	Interest Expense
	Discount on Bonds Payable
	Cash

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Year 2, June 30	Interest Expense
	Discount on Bonds Payable
	Cash

3. Determine the total interest expense for Year 1.
$

Answer 1

1)	Date	Account titles & Explanations				Debit	Credit
	1-Jul	Cash				25,601,920
		Discount on bonds				6,398,080
		bonds payable					32,000,000
2)	31-Dec	interest expense				1792134
		discount on bonds					32134
		cash	(32,000,000*11%*1/2)				1760000
	30-Jun	interest expense				1794384
		discount on bonds					34384
		cash					1760000
3)		Total interest expense				3586518