A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual
ID: 2465890 • Letter: A
Question
A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face rate of interest on January 2, 2013. The issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate. Interest payments are made annually Give the journal entry to record the issuance of the bonds. (For a compound transaction, if an amount box does not require an entry, leave it blank.) Give the journal entry to record the recognition of interest expense at December 31. 2013. Any premium or discount should be amortized using the effective interest rate methed. (For a compound transaction, if an amount box does not require an entry, leave it blank.) (Round your answers to the nearest dollar.) Give the journal entry to record the interest paid to the bondholders on January 2. 2014. Give the journal entry to record the recognition of interest expense at December 31,2014. Any premium or discount should be amortized using the effective interest rate methed. (For a compound transaction, if an amount box does not require an entry, leave it blank.) (Round your answers to the nearest dollar.)Explanation / Answer
Solution:
Par Value of Bond = $20,000,000
Interest Rate = 8%
Interest Amount = $20,000,000 x 8% = $1,600,000
Issue Price of Bond = $19,866,397
Life of Bond = 10 years
No. of payments to be done during the life of bond = 10
Since, Issue price is less than par value, bonds are issued at discount.
Discount on Bonds Payable = Par Value – Issue Price = $20,000,000 - $19,866,397 = $133,603
Discount on Bonds Payable $133,603 is amortized over the life of project. Each time when the interest payment will be made $13,360.30 ($133,603 / 10) needs to be amortized.
A) Journal Entry to record the issuance of bond
Date
Debit
Credit
Jan 2, 2013
Cash A/c Dr.
$19,866,397
Discount on Bonds Payable Dr.
$133,603
To Bonds Payable
$20,000,000
(Being bonds issued at discount)
B) Journal Entry to record the recognition expenses at Dec 31, 2013.
Dec 31, 2013
Interest Expenses Dr.
$1,609,178
To Cash Interest Payable to Bond Holders
$1,600,000
To Amortization of Discount on Bonds Payable
$9,178
C)
Jan 2, 2014
Cash Interest Payable to Bond Holders Dr.
$1,600,000
To Cash A/c
$1,600,000
D)
Dec 31, 2014
Interest Expenses Dr.
$1,609,922
To Cash Interest Payable to Bond Holders
$1,600,000
To Amortization of Discount on Bonds Payable
$9,922
Schedule of Amortization of Bond Discount as per effective interest rate method
A
B
C
D
E
F
Date
Interest Payment
Interest expenses @ 8.1% x Beginning Book Value
Amortization of Bonds Discount
Debit Balance in Bonds Discount A/c
Credit Balance in Bonds Payable A/c
Book Value of Bonds (F-D)
Jan 2, 2013
$133,603
$20,000,000
$19,866,397
Dec 31, 2013
$1,600,000
$1,609,178
$9,178
$124,425
$20,000,000
$19,875,575
Dec 31, 2014
$1,600,000
$1,609,922
$9,922
$114,503
$20,000,000
$19,885,497
Date
Debit
Credit
Jan 2, 2013
Cash A/c Dr.
$19,866,397
Discount on Bonds Payable Dr.
$133,603
To Bonds Payable
$20,000,000
(Being bonds issued at discount)
B) Journal Entry to record the recognition expenses at Dec 31, 2013.
Dec 31, 2013
Interest Expenses Dr.
$1,609,178
To Cash Interest Payable to Bond Holders
$1,600,000
To Amortization of Discount on Bonds Payable
$9,178
C)
Jan 2, 2014
Cash Interest Payable to Bond Holders Dr.
$1,600,000
To Cash A/c
$1,600,000
D)
Dec 31, 2014
Interest Expenses Dr.
$1,609,922
To Cash Interest Payable to Bond Holders
$1,600,000
To Amortization of Discount on Bonds Payable
$9,922
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