Question

Recording Bond Issuance Chart of Accounts General Journal Present Value Tables Instructions On January 1, 2016, Knorr Corporation issued $900,000 of 6%, 5-year bonds dated January 1, 2016. The bonds pay interest annually on December 31 were issued to yield 7%. Bond issue costs associated with the bonds totaled 510,687 46. Required: Prepare the journal entries to record the following: January 1, 2016 December 31, 2016 December 31, 2016 Sold the bonds at an effective rate of 7% First interest payment using the effective interest method Amortization of bond issue costs using the straight-line method December 31, 2017 December 31, 2017 Second interest payment using the effective interest method Amortization of bond issue costs using the straight-line method

Answer 1

Answer :-

Date	Particulars	Debit	Credit
1/1/2016	Cash A/c ($900,000 -$10,687.46 - $36,901.8)	$852,410.74
	Discount on bonds payable A/c (Note- 1)	36,901.8
	Deferred bond issue costs A/c	$10,687.46
	To Bonds payable A/c		$900,000
31/12/2016	Interest expense A/c (Note -2)	$60,416.87
	To Discount on bonds payable A/c		6,416.87
	To Cash A/c ($900,000 × 6%)		$54,000
31/12/2016	Bond Issue Cost expense /Interest Expense A/c($10,687.46/5)	$2,137.49
	To Deferred bond issue costs A/c		$2,137.49
31/12/2017	Interest expense A/c(Note -3)	60866.04
	To Discount on bonds payable A/c		6866.04
	To Cash A/c($900,000 × 6%)		$54,000
31/12/2017	Bond Issue Cost expense/Interest Expense A/c($10,687.46/5)	$2,137.49
	To Deferred bond issue costs A/c		$2,137.49

Note 1 :-

Interest Payable = $900,000 × 6% = $54,000

Effective rate (r) = 7%

Time period (i) = 5 year

PVAF ( 7% ,5) = 4.10020

PV (7% ,5) = 0.712986

Present value of interest = $54,000 × 4.10020 = $221,410.8

Present value of principal = $900,000 × 0.712986 = $641,687.4

Current Price = $221,410.8 + $ 641,687.4 = $863,098.2

Discount on Bond Payable = $ 900,000 - $863,098.2 = $36,901.8

Note 2 :-

Interest expense = Current Price of Bond × 7%

Interest Expense = $863,098.2 × 7% = $60,416.87

Note 3 :-

Interest Expense = ($863,098.2 + 6,416.87) × 7% = $60,866.04