1.A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 20
ID: 2462987 • Letter: 1
Question
1.A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2015. Interest is paid on June 30 and December 31. The proceeds from the bond issuance total $9,802,072. Management uses the effective-interest method to amortize bond discounts and premiums.
prepare the journal entries, in T-account format, to recognize the following transactions:
1)issuance of the bond on January 1, 2015
2)payment of interest on June 30, 2015
3)amortization on June 30, 2015
4)payment of interest on December 31, 2015
5)amortization on December 31, 2015
Explanation / Answer
1) cash Dr. $9802072
Discount on Bond Dr.$197928
To Bond payable $10000000
(2 & 3) Interest expense($9802072 * 8% *6/12) Dr.$392083
To Disocunt on Bond $2083
To cash ($10000000 *7.8%*6/12) $390000
Payment of interest on june 30, 2015 = $390000
Amortisation of june30 ,2015 = (392083 - 390000) = $2083
(4&5 ) Interest expense($9804155 * 8% *6/12) Dr.$392166
To Disocunt on Bond $2166
To cash ($10000000 *7.8%*6/12) $390000
Note:- carrying value after 6months of interest = opening value + discount amortisation
=$9802072 + 2083
=$9804155
Payment of interest on December 31, 2015 = $390000
Amortisation of December 31 ,2015 = (392166 - 390000) = $2166
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