On the first day of its fiscal year, J Co. issued $1,000,000 of five-year, 8% bo

ID: 2412248 • Letter: O

Question

On the first day of its fiscal year, J Co. issued $1,000,000 of five-year, 8% bonds to finance the remodeling of an office building. Interest is payable semiannually. The bonds were issued at an effective interest rate of 11%, resulting in J Co. receiving cash of $886,935. Give the account to be debited, the account to be credited, and the amount to journalize the amortization of the discount/premium at the end of the first year using the straight-line method of amortization. (Amortization of discount/premium is to be recorded annually.) All amounts are to be rounded to the nearest dollar.

Explanation / Answer

Journal Entry in the Books of J Co

Accounts Tittles and explanations

Debit ($)

Credit ($)

Interest Expenses A/c

102,613

To Discount on Bond Payable A/c

22,613

To Cash A/c [ $10,00,000 x 8% ] / 2

80,000

[ Journal entry to record the amortization of the discount on issue of bond using the straight-line method of amortization]

Discount on Issue of Bond

= Face Value of the bond – Issue Price

= $10,00,000 - $886,935

= $113,065

Amortization of Discount on Issue of Bond during each semi annual period using straight line method of amortisation

= $113,065 / 5 Periods

= $22,613