Legacy issues $710,000 of 8.0%, four-year bonds dated January 1, 2013, that pay

Question

Legacy issues $710,000 of 8.0%, four-year bonds dated January 1, 2013, that pay interest semiannually on June 30 and December 31. They are issued at $621,812 and their market rate is 12% at the issue date.

a) Prepare the January 1, 2013, journal entry to record the bonds' issuance

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

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

d) Prepare the journal entries to record the first two interest payments.

a) Prepare the January 1, 2013, journal entry to record the bonds' issuance

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

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

d) Prepare the journal entries to record the first two interest payments.

Explanation / Answer

A. Jan.1. Being Bonds are issued at discount.

Bond payable dr 710000

To Discount on issue of bond 88188

To 8% Bond carrying value. 621812

B. Interest expense is calculated as:

Add all cash interest payments and discount.

Total Bond Interest Expense
710,000 - 621812 = $88188 total discount

+ 710,000 x 8% x 4 = $227200 total cash interest payments
= $315388
$710000 × 8% × 6/12 = $28400 is only the cash interest payment for one-half of a year.

C. Amortisation of discount = 88188/8 = $ 11023.5

Interest expense =$ 28400

Amortisation of bond = 710000 - (88188-11023.5)

D. Interst expense 28400

Amortisation 11023.5

To cash 39423.5.

= $632836

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