Question

Company issued $80,000 of 10-year, 8% bonds payable on January 1, 2018. Lincoln Company pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line amortization method. The company can issue its bonds payable under various conditions.

1. Journalize Lincoln Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at face value. Explanations are not required.

2. Journalize Lincoln Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 93. Explanations are not required.

3. Journalize Lincoln Company's issuance of the bonds and first semiannual interest payment assuming the bonds were issued at 107. Explanations are not required.

4. Which bond price results in the most interest expense for Lincoln Company? Explain in detail.

Answer 1

Answer is given below with all working

Issued at face value Issue price Interest at 8% for semi-annual $80,000 $3,200 Credit Bond issue 1 Date Account Titles and explanation 01/01/2018 Cash To Bonds payable Debit $80,000 $80,000 Credit First interest payment 1 Date Account Titles and explanation 06/30/2018 Interest Expense To Cash Debit $3,200 $3,200 2) Issued at Discount Face value Issue price-93% Discount Discount amortization per payment $80,000 $74,400 $5,600 $280 20 payments Credit Bond issue | Date Account Titles and explanation 01/01/2018 Cash Discount on issue of bonds To Bonds payable Debit $74,400 $5,600 $80,000 Credit First interest payment Date Account Titles and explanation 06/30/2018 Interest Expense To Discount on issue of shares To Cash Debit $3,480 $280 $3,200 Issued at Premium Face value Issue price -107% Premium Premium amortization per payment $80,000 $85,600 $5,600 $280 20 payments Credit Bond issue Date Account Titles and explanation 01/01/2018 Cash To Premium on Bonds payable To Bonds payable Debit $85,600 $5,600 $80,000 Credit First interest payment 1 Date Account Titles and explanation 06/30/2018 Interest Expense Premium on Bonds payable To Cash Debit $2,920 $280 $3,200 4) Interest expense will be higher when bonds are issued at discount The reason is in addition to interest expense there is additional discount amortization Hence total interest cost will be interest on bonds + Discount amortized On the other hand bonds issued at premium will reduce the interest expense since premium is amortized