Question

I only need answers for bonds that were issued at 98 not 101

Amortization of a Bond Discount and Premium On September 1, 2018, Evansville Lumber Company issued $80 million in 20-year, 10 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The company's fiscal year ends at December 31. Instructions a. Make the necessary adjusting entries at December 31, 2018, and the journal entry to record the payment of bond interest on March 1, 2019, under each of the following assumptions. 1. The bonds were issued at 98. (Round to the nearest dollar.) 2. The bonds were issued at 101. (Round to the nearest dollar.) b. Compute the net bond liability at December 31, 2019, under assumptions 1 and 2. (Round to the nearest dollar.) c. Under which of these assumptions, 1 or 2, would the investor's effective rate of interest be higher? Explain.

Answer 1

a. Adjusting journal entries if the bond issued at 98:

Date	Account titles	Dr	Cr
31-Dec-18	Expenses for Interest on Bonds Issued A/c	$ 2,693,334.00
	Discount-Bonds Payable A/c		$        26,667.00
	interest on Bonds Payable A/c		$ 2,666,667.00
	(To record interest due on bonds)
1-Mar-19	interest on Bonds Payable A/c	$ 2,666,667.00
	Expenses for Interest on Bonds Issued A/c	$ 1,346,667.00
	Discount-Bonds Payable A/c		$        13,334.00
	Cash A/c (B.fig)		$ 4,000,000.00
	(To record interest on bonds paid)

Working:

i. Discount amount to be amortized = $80 million * 10% * 4 months/ 20 years = $1.6 million

Discount to be amortized as in Dec 31 = $1.60 million * 4 months / 20 years = $26,667

ii. Interest payable = $80 million * 10% * 4/ 12 =$2,666,667

iii. Discount on bonds payable on 1 march 2019 = $1.6 million * 2 months /20 years = $13,334

iv.

b. Net bond liability computation as on Dec 31,2019 if bond issued at $98:

Total discount amortization = $1.60 million

Discount amortization as on Dec 31,2019 = $1.6 million * (12+4 months) / 20 years = $106,667

Net discount amortization = $1.6 million - $106,667 = $1,493,333

Hence, Net bond liability = $80,000,000 -$1,493,333 = $78,506,667