Legacy issues $325,000 of 5%, four-year bonds dated January 1, 2013, that pay in

Question

Legacy issues $325,000 of 5%, four-year bonds dated January 1, 2013, that pay interest semiannually on June 30 and Dec 31. They are issued at $292181 and their market rate is 8% at the issue date.

1. Prepare the January 1, 2013 journal entry to record the bonds issuance

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

3. Prepare a effective interest amortization table for the bonds first two years

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

Explanation / Answer

The journal entry on jan I, 2013 for issuance of bonds is

Cash Dr 292181

Discount on bonds Dr 32819

Bonds payable cr 325000

(Being bonds are issued at discount)

Part 2

The total bond interest expense is recognised as discount on bonds I. e. $ 32819

Part 3

The total interest expense of $ 32819 is amortized equally into 4 years. So $ 8205 (32819/4) is equally distributed in 4 years.

Part 4

Interest would be calculated as

325000 @ 5 % = $ 16250.

That interest is given half yearly so interest for half yearly is $ 8125.

The journal entry on June 30 is

Cash Dr 16430

Interest exp 8125

Discount payable 8305

(Being cash paid)

The entry is same for 31 dec

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