Question

Your company issued 1,000, 3.2% bonds (face value of each bond is $1,000) at 97.2911 on July 1st, 2019. The bonds are due on July 1, 2024, with interest payable each January 1 and July 1. The market rate at the time of the bond issuance was 3.8 Percent. Use the effective-interest method to calculate both the interest expense and the amortization of the bond discount when each interest payment is made.

[Adjusting Entry Required]

What is the adjusted entry?

Answer 1

Adjusting entry:

Date	Account title and explanation	Debit	Credit
12/31/2019	Interest expense	$18,485
	Interest payable		$16,000
	Discount on bonds payable		$2,485
	[To record accrued interest on bonds payable]

Calculations:

Face value (1,000 x $1,000)	$1,000,000
Issue price [1,000 x ($1,000 x 0.972911)]	$972,911
Discount on bonds payable	$27,089

Interest expense (July 1 - Dec 31) = $972,911 x 3.8% x (6 months/12 months)

= $36,971 x 6/12

= $18,485

Interest payable (July 1 - Dec 31) = $1,000,000 x 3.2% x (6 months/12 months)

= $32,000 x 6/12

=$16,000

Discount on bonds payable (July 1-Dec 31) = $18,485-$16,000

=$2,485