Amortize Discount by Interest Method On the first day of its fiscal year, Ebert
ID: 2537891 • Letter: A
Question
Amortize Discount by Interest Method
On the first day of its fiscal year, Ebert Company issued $18,000,000 of 5-year, 10% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 12%, resulting in Ebert Company receiving cash of $16,675,281. The company uses the interest method.
a. Journalize the entries to record the following:
1. Sale of the bonds. Round amounts to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.
2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.
3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. For a compound transaction, if an amount box does not require an entry, leave it blank.
b. Compute the amount of the bond interest expense for the first year. Round amounts to the nearest dollar.
Annual interest paid
Discount amortized
Interest expense for first year
Explanation / Answer
a.
Working:
b.
Annual interest paid: $1800000
Discount amortized: $207065
Interest expense for first year: $2007065
Transaction Account Titles and Explanation Debit Credit 1 Cash 16675281 Discount on bonds payable 1324719 Bonds payable 18000000 (To record sale of bonds at discount) 2 Interest expense 1000517 Discount on bonds payable 100517 Cash ($18000000 x 10% x 6/12) 900000 (To record payment of first semiannual interest) 3 Interest expense 1006548 Discount on bonds payable 106548 Cash ($18000000 x 10% x 6/12) 900000 (To record payment of second semiannual interest)Related Questions
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