Question

Jacob Company sold $1,000,000 of 6%, 10-year bonds at 96 on January 1, 2021. The bonds were dated January 1, 2021 and pay interest on June 30 and December 31. Jacob paid $50,000 in bond issue costs. If Jacob uses the straight-line amortization, the amount of interest expense for year 2021 would be: (Do not add dollar sign; do not add comma by yourself to your amount; round the answer to the whole number)

Answer 1

Answer : 69000

Explanation :

Face value of bonds = $ 1,000,000

Interest rate = 6% ( Semi annually)

Total cash paid for interest Expenses during 2021 = [$ 1,000,000 X 6/100 X 1/2] X 2 times in a year = $ 60,000

Total amount of discount on issuance of bonds = $ [1,000,000/100] X { $ 100 - $ 96} = $ 40,000

Number of time it has been amortized = 10 years X 2 times in a year = 20 times

Amortization of discount on issuance of bonds in 2021 = [$ 40,000 / 20] X 2 = $ 4,000

Total issuance cost of bonds = $ 50,000

Amortization of issuance cost of bonds in 2021 = [$ 50,000 / 20] X 2 = $ 5,000

Total amount of interest to be changed ( debited) = Amount of cash paid for interest expense in 2021 + Amortization of discount on issuance of bonds in 2021 + Amortization of issuance cost of bonds in 2021 = $ 60,000 + $ 4,000 + $ 5,000 = $ 69,000

Journal Entries

Date	Accounts titles and description	Debit($)	Credit($)
June 30,2021	Interest Expense	34,500
	Cash (1,000,000X 6% X 1/2)		30,000
	Discount on issuance of bonds [(10,000 X 4) /20]		2,000
	Insurance cost of bonds . [ 50,000/20]		2,500
	[Interest expense paid and discount on bonds & issuance cost amortized ]
December 31,2021	Interest Expense	34,500
	Cash		30,000
	Discount on issuance of bonds		2,000
	Issuance cost of bonds		2,500
	[Interest expense paid and discount on issuance of bonds & issuance cost of bonds amortized ]

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