A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual

Question

A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face rate of interest on December 31, 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. Required: A) Give the journal entry to record the issuance of the bonds. B) Give the journal entry to record payment of the interest expense at December 31, 2014. Any premium or discount should be amortized using the effective interest rate method.

Explanation / Answer

Par Value $ 20,000,000.00 Bond Price $ 19,866,397.00 Discount on bonds Payable $        133,603.00 coupon rate 8% Interest $    1,600,000.00 Discount Amortized over 10 years $          13,360.30 Effective interest Rate $                     0.08 effective interest $    1,609,178.16 Discount Amortized at the end of each interest payment $          (9,178.16) Date Particular Amount (DR) Amount (CR) 31-Dec-13 Cash A/c    $ 19,866,397.00 Discount on bonds payable $        133,603.00    Bonds Payable $     20,000,000.00 31-Dec-14 Interest Expenses A/c $    1,609,178.16     Cash A/c $       1,600,000.00    Discount on bonds payable $                9,178.16 Date Interest Payment stated @8% Interest Expense @8.1% Amortization of bonds discount Debit Balance in the account(Bonds discount) Credit Balance in the account (Bonds Payable) Book Value of the bonds 31-Dec-13 $     133,603.00 $ 20,000,000.00 $ 19,866,397.00 31-Dec-14 $                                                      1,600,000.00 $    1,609,178.16 $                9,178.16 $     124,424.84 $ 20,000,000.00 $ 19,875,575.16

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