Recording Interest Expense for Bonds Sold at a Discount: Straight-Line Method Wh

Question

Recording Interest Expense for Bonds Sold at a Discount: Straight-Line Method Why When interest-bearing bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period plus the discount amortization for the period. Under the straight-line method, an equal amount of discount is amortized each period. Information: On December 31, 2013, Franzen Inc. issues 5-year, $100,000,000, 8% bonds at 99 (S99,000,000). The discount at the time of the sale is $1,000,000. Interest is paid semiannu- ally on June 30 and December 31 Required: 1. Prepare the journal entry to record the issuance of the bonds on December 31, 2013. 2. Calculate the amount of discount that will be amortized each semiannual period. 3. Calculate the amount of interest expense for each semiannual period. 4. Complete an amortization table for each of the 10 semiannual periods. 5. Prepare the journal entries necessary to (a) recognize the interest expense on June 30 and December 31, 2014 2018, and (b) record the repayment of the loan principal on December 31, 2018.

Explanation / Answer

Req 1: Journal Entry: Cash Account Dr. 99,000,000 Discount on Bonds payable Dr. 1,000,000       Bonds payable 100,000,000 Req 2 &3: Par value of Bonds: 100,000,000 Issue price 99,000,000 Total Discount 1,000,000 Periods 10 Amortization of discount in each period 100000 Cash interest (100,000,000*4%) 4,000,000 Interest expense in each period 4,100,000 Req 4: Period Interst paid Discount Interest Bonds Unamortize Book Value Amortized Expense Par value Discount Bonds 30.06.2014 4,000,000 100,000 4,100,000 100,000,000 900,000 99,100,000 31.12.2014 4,000,000 100,000 4,100,000 100,000,000 800,000 99,200,000 30.06.2015 4,000,000 100,000 4,100,000 100,000,000 700,000 99,300,000 31.12.2015 4,000,000 100,000 4,100,000 100,000,000 600,000 99,400,000 30.06.2016 4,000,000 100,000 4,100,000 100,000,000 500,000 99,500,000 31.12.2016 4,000,000 100,000 4,100,000 100,000,000 400,000 99,600,000 30.06.2017 4,000,000 100,000 4,100,000 100,000,000 300,000 99,700,000 31.12.2017 4,000,000 100,000 4,100,000 100,000,000 200,000 99,800,000 30.06.2018 4,000,000 100,000 4,100,000 100,000,000 100,000 99,900,000 31.12.2018 4,000,000 100,000 4,100,000 100,000,000 0 100,000,000 Req 5: Journal entries: Date Accounts title and explanation Debit $ Credt $ June 30 2014 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 Dec31 2014 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 June 30 2015 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 Dec 31 2015 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 June 30 2016 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 Dec 31 2016 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 June 30 2017 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 Dec 31 2017 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 June 30 2018 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 Dec 31 2018 Interest expense Dr. 4,100,000     Cash Account 4,000,000     Discount on Bonds payable 100,000 Dec 31 2018 Bonds payable Dr. 100,000,000      Cash Account 100,000,000

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