Question

Legacy issues $570,000 of 8.5%, four-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $508,050 and their market rate is 12% at the issue date.

1. Prepare the January 1, 2017, journal entry to record the bonds' issuance.

2. Determine the total bond interest expense to be recognized over the bonds' life.

3. Prepare a straight-line amortization table for the bonds' first two years.

4. Prepare the journal entries to record the first two interest payments.

Answer 1

1
Jan. 1, 2017	Cash	508050
	Discount on bonds payable	61950
	Bonds payable		570000
2
Total bond interest expense over life of bonds:
Amount repaid:
8 payments of $24225	193800
Par value at maturity	570000
Total repaid	763800
Less amount borrowed	508050
Total bond interest expense	255750
3
Semiannual Interest Period­ End	Cash Interest Paid	Bond Interest Expense	Discount Amortization	Unamortized Discount	Carrying Value
01/01/2017				61950	508050
06/30/2017	24225	31969	7744	54206	515794
12/31/2017	24225	31969	7744	46462	523538
06/30/2018	24225	31969	7744	38718	531282
12/31/2018	24225	31969	7744	30974	539026
4
June 30,2017	Bond interest expense	31969
	Discount on bonds payable		7744	=61950/8
	Cash		24225	=570000*8.5%/2
Dec 31,2017	Bond interest expense	31969
	Discount on bonds payable		7744
	Cash		24225