Question

On January 1, Taylor Inc. issued $200,000 par bonds with a stated rate of 8% that mature in 5 years. The market rate on the date of issuance was 10% and the bonds pay interest semiannually on June 30 and December 31. Prepare the journal entry to record the issuance of the bonds. Also prepare the journal entry for June 30 and December 31 of the first year assuming Taylor uses the SL amortization method. Finally, indicate the total amount of interest expense that will be recognized over the life of the bonds.

Answer 1

Based on the information available in the question, we can answer as follows:-

Step 1:- Calculate the issue price of the bonds

Table Values are based on
n=	10
i=	5%
Cash Flow	Amount	Table Value	Present Value
Interest payments	8,000	7.72173	61,773.84
Maturity Value	200,000	0.61391	122,782.65
Issue Price of the Bonds		184,556.49

The Issue price of the Bonds = $184,556(Rounded)

Step 2:- Record the journal entry to issue the bonds:-

		Debit	Credit
January 1	Cash A/c	184,556
	Discount on Bonds payable A/c	15,444
	To Bonds Payable A/c		200,000
	(To record the issuance of bonds)

Step 3:- The journal entries for year 1

Discount amortization under the straight line method = Discount on Bonds payable / No.of periods

=$15,444/10

=$1,544 per period.

The journal entry is recorded as follows:-

	Particulars	Debit	Credit
June 30, Year 1	Interest expense A/c Dr.	8,000
	To Discount on bonds Payable A/c		1,544
	To Cash A/c		6,456
	(To record the interest payment on the bonds)

	Particulars	Debit	Credit
December 31, Year 1	Interest expense A/c Dr.	8,000
	To Discount on bonds Payable A/c		1,544
	To Cash A/c		6,456
	(To record the interest payment on the bonds)

Step 4:- The total interest expense that will be recorded over the life of the bonds is :-

= Interest expense period * No.of periods

=$8,000 * 10 periods

=$80,000

Interest expense over the life of the bonds = $80,000

Please let me know if you have any questions via comments and all the best :)