Question

On February 1, Year 1, Levi Statin Company issued 9% bonds, dated February 1, with a face amount of $800,000. The bonds were sold for $731,364 and mature on January 31, Year 21 (20 years). The market rate for bonds of similar risk and maturity was 10%. Interest is payable semiannually on January 31 and July 31. Levi Statin’s fiscal year ends on December 31.

Instructions:

A. Prepare the journal entry to record the issuance of the bonds on February 1, Year 1.

B. Prepare the journal entry to record interest expense on July 31, Year 1 on the effective-interest

     method.

C. Prepare the journal entry to accrue interest expense on December 31, Year 1.

D. Prepare the journal entry to record the payment of interest on January 31, Year 2.

Answer 1

Working Notes: 1
	Calculation of Discount amount and half yearly coupon rate
		Par Value of the Bonds =	$                       8,00,000
		Issued price	$                       7,31,364
		Discount to be amortized	$                           68,636
		Rate of interest of Coupon	9%
		Yearly Coupon Amount	$                           72,000
		Half yearly coupon amount =	$                           36,000
		Market Rate of interest =	10%
		Half yearly interest rate = 10% / 2 =	5.00%
Working Notes: 2
	Schedule of Interest revenue and bond premium Amortization
	Effective interest Method
	Date	Cash Paid	Interest Expenses @ 5.0% on Carrying Amount	Increase in carrying value	Caryying Amount
	February 01. Year				$             7,31,364
	July 31. Year 1	$                                                                                   36,000	$                           36,568	$                      568	$             7,31,932
	January 31. Year 2	$                                                                                   36,000	$                           36,597	$                      597	$             7,32,529
	Calculation of interest expenses for the first year end as on December 31
	Date	Cash Paid	Interest Expenses @ 5.0% on Carrying Amount	Increase in carrying value
	Dec 31. Year 1	$                                                                                   30,000	$                           30,497	$                      497
SOLUTION A:
	Journal Entries
	Date	Account Title and explanation	Debit	Credit
	Feb 01. Year 1	Cash	$                       7,31,364
		Discount on issuance of Bonds	$                           68,636
		Bonds Payable		$             8,00,000
		(To Recordh the issuance of Bonds)
SOLUTION B:
	Journal Entries
	Date	Account Title and explanation	Debit	Credit
	July 31. Year 1	Interest Expenses	$                           36,568
		Cash		$                36,000
		Discount on issuance of Bonds		$                      568
		(To Record the interest expenses as on July 31)
SOLUTION C:
	Journal Entries
	Date	Account Title and explanation	Debit	Credit
	Dec 31. Year 1	Interest Expenses	$                           30,497
		Interest Payable		$                30,000
		Discount on issuance of Bonds		$                      497
		(Record the interest expenses as on Dec 31)
SOLUTION D:
	Journal Entries
	Date	Account Title and explanation	Debit	Credit
	Janauary 31. Year 2	Interest Expenses	$                             6,100
		Interest Payable	$                           30,000
		Cash		$                36,000
		Discount on issuance of Bonds		$                      100
		(Record the interest expenses as on Jan 31. year 2)