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.

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

2. Prepare a straight line amortization table for the bonds' first two years

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

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.

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

2. Prepare a straight line amortization table for the bonds' first two years

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

Explanation / Answer

1.

When bonds are issued for less than face value, they are said to be issued at a discount. Interest expense is calculated as all cash interest payments plus the discount.

Total Bond Interest Expense
710000 - 621812 = $88188 total discount
710000 x 8% x 4 = $227200 total cash interest payments
88188 + 227200 = $315388 total bond interest expense

2.*Note: $23,200 is only the cash interest payment for one-half of a year. You're looking for the TOTAL interest EXPENSE.

I'll do the amortization chart for the first payment. Since straight-line amortization is being used, the calculations will be the same for each payment.

Each cash payment will always be 710000x 4% = $28400
Each amortization of the discount will always be 88188 / 8 = $11023.50 (rounded)
Each bond interest expense will be 28400 + 11023.50 = $ 39423.50
The bonds payable balance will always be $710,000

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