Question

On July 1, 2017 South Carolina Table Co issued a $600,000 face value of 10%, 10 year bonds. The bonds call for a semi annual interest payments and mature on July 1, 2027. The company received cash of 531,180, a price that yields 12%. Assume that that the company’s fiscal year ends on March 31. Prepare journal entries (to the nearest $) to record the bond interest expense on January 1, 2018, and the adjustment needed on March 31st, 2018 using the interest method. Calculate all amounts to the nearest dollar.

Answer 1

We need to prepare the Bond Amortization table to calculate the interest expenses on given two dates using market interest method.

Schedule of Bond Discount Amortization
Effective Interest Method
Date	Interest Expense (Carrying Value at beginning of the year * Market Interest Rate 12% * 1/2 half yrly)	Cash Paid (Face Value 600,000 * Coupon Interest Rate 10% * 1/2 half yrly)	Discount Amortized (Interest Expense - Cash Paid)	Carrying Amount of Bonds
7/1/17				$531,180
1/1/18	$31,871	$30,000	$1,871	$533,051
7/1/18	$31,983	$30,000	$1,983	$535,034

Journal entry to record bond interest expense on Jan 1, 2018

Date	General Journal	Debit	Credit
Jan'1, 2018	Interest Expense	$31,871
	Discount on Bonds Payable		$1,871
	Cash or Interest Payable		$30,000
	(Interest Expenses recorded)

Adjustment Entry on March 31, 2018

Date	General Journal	Debit	Credit
March.31, 18	Interest Expense (31983*1/2 i.e. for only 3 months)	$15,992
	Discount on Bonds Payable (bal fig)		$992
	Interest Payable (30,000*1/2)		$15,000
	(Adjustment Entry on March 31, 2018 recorded)

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