A company issued $4,000,000 of 8% bonds on October 1, 2014, due on October 1, 20
ID: 2461270 • Letter: A
Question
A company issued $4,000,000 of 8% bonds on October 1, 2014, due on October 1, 2019. The interest is to be paid twice a year on April 1st and October 1st. The bonds were sold to yield 10% effective annual interest. The company closes it's books annually on December 31st. Carrying amount of bonds: $3,691,117
1. Prepare the adjusting entry for December 31,2015 using the STRAIGHT LINE INTEREST METHOD.
2.Compute the STRAIGHT LINE INTEREST EXPENSE to be reported in the income statement for the year ended December 31,2015.
Explanation / Answer
(1) life of Bond = 6year( from 2014 to 2019)
Number of amortisation in 6years = 2 semi-annually * 6years
= 12
Amortisation of discount per interest payment = $308883 /12
= $25740.25
On 31Decmeber,2015 (from october 2015 to December 2015) Months =$4000000 *3/12 * 8%
=$80000
December 31,2015
Interest Expense Dr. $92870.12
To cash $80000
To Discount on Bond Amortisation($25740.25/6months*3months) $12870.12
Note:- cash Dr.$3691117
Discount on Bond Dr.$308883
To Bonds payable $4000000
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