On the first day of the fiscal year, a company issues a $2,250,000, 11%, five-ye

Question

On the first day of the fiscal year, a company issues a $2,250,000, 11%, five-year bond that pays semiannual interest of $123,750 ($2,250,000 × 11% × ½), receiving cash of $2,206,310.

Journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles.

CHART OF ACCOUNTSGeneral Ledger

ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable 122 Allowance for Doubtful Accounts 126 Interest Receivable 127 Notes Receivable 131 Merchandise Inventory 141 Office Supplies 191 Land 194 Office Equipment 195 Accumulated Depreciation-Office Equipment

Explanation / Answer

Since the cahs received is less than amount issued it is a discount bond
let us find the ytm of the bond using rate formuale in excel
=rate(nper,pmt,pv,fv,type)
=rate(10,123750,-2206310,2250000,0)
=5.76%
and annual=5.76%*2=11.52%

Interest payment:
Interest expense (db) (5.76%)*book value of bond=5.76%*(2206310)=127102.08
discount on bonds payable (cr) 3352.08
Cash (cr) =(11%/2)*2250000=123750

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