Effective Interest Discount Amortization Chowan Corporation issued $100,000 of 1
ID: 2480503 • Letter: E
Question
Effective Interest Discount Amortization Chowan Corporation issued $100,000 of 10% bonds dated January 1,2013, for $96,832.73 on January 1, 2013. The bonds are due December 31, 2016, were issued to yield 11%, and, pay interest semiannually on June 30 and December 31. Chowan uses the effective interest method of amortization. Prepare the journal entries to record the issue of the bond on January 1, 2013, and the interest payment on June 30, 2013, December 31, 2013, and June 30, 2014. If an amount box does not require an entry, leave it blank. Round your answers to two decimals places, if necessary.
Explanation / Answer
Discount on bonds = $(100,000 - 96,832.73) = $3,167.27
Semi-annual coupon (interest) payment = $100,000 x 10% x (6/12) = $5,000
Bond amortization shedule for first 3 payments are shown below.
JOURNAL ENTRIES:
(a) 1 Jan 2013
DR Cash $96,832.73
DR Discount on bonds $3,167.27
Bonds payable $100,000
(To record issue of bonds at discount)
(b) 30 Jun 2013
DR Interest expense $5,301.05
Discount on bonds $301.05
Cash $5,000
(To record first interest payment)
(b) 31 Dec 2013
DR Interest expense $5,317.61
Discount on bonds $317.61
Cash $5,000
(To record second interest payment)
(c) 30 Jun 2014
DR Interest expense $5,335.08
Discount on bonds $335.08
Cash $5,000
(To record third interest payment)
Date Interest payment @5% x Face Value Interest expense @5.5% of Book Value Amortization of Discount Balance in Bond Discount Bond Payable Book Value of Bond (A) (B) (C) = (B) - (A) (D) (E) (F) = (E) - (D) 01-Jan-13 3,617.27 1,00,000 96,382.73 30-Jun-13 5,000 5,301.05 301.05 3,316.22 1,00,000 96,683.78 31-Dec-13 5,000 5,317.61 317.61 2,998.61 1,00,000 97,001.39 30-Jun-14 5,000 5,335.08 335.08 2,663.54 1,00,000 97,336.46
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